Public Packages Holdings Berhad (KLSE:PPHB) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Public Packages Holdings Berhad (KLSE:PPHB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Public Packages Holdings Berhad

What Is Public Packages Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Public Packages Holdings Berhad had RM26.1m of debt in December 2020, down from RM35.9m, one year before. But it also has RM80.1m in cash to offset that, meaning it has RM54.1m net cash.

How Healthy Is Public Packages Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Public Packages Holdings Berhad had liabilities of RM46.8m due within 12 months and liabilities of RM18.0m due beyond that. Offsetting these obligations, it had cash of RM80.1m as well as receivables valued at RM44.4m due within 12 months. So it can boast RM59.7m more liquid assets than total liabilities.

This surplus strongly suggests that Public Packages Holdings Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Public Packages Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Public Packages Holdings Berhad saw its EBIT decline by 2.5% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is Public Packages Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Public Packages Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Public Packages Holdings Berhad recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Public Packages Holdings Berhad has RM54.1m in net cash and a decent-looking balance sheet. So is Public Packages Holdings Berhad's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Public Packages Holdings Berhad .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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