Here's Why Priceworth International Berhad (KLSE:PWORTH) Can Afford Some Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Priceworth International Berhad (KLSE:PWORTH) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Priceworth International Berhad

How Much Debt Does Priceworth International Berhad Carry?

As you can see below, Priceworth International Berhad had RM17.3m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM6.16m in cash offsetting this, leading to net debt of about RM11.1m.

A Look At Priceworth International Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Priceworth International Berhad had liabilities of RM110.5m due within 12 months and liabilities of RM24.2m due beyond that. On the other hand, it had cash of RM6.16m and RM22.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM106.3m.

This is a mountain of leverage relative to its market capitalization of RM160.4m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Priceworth International Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Priceworth International Berhad made a loss at the EBIT level, and saw its revenue drop to RM50m, which is a fall of 62%. That makes us nervous, to say the least.

Caveat Emptor

While Priceworth International Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM28m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM13m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 4 warning signs for Priceworth International Berhad (1 is potentially serious) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.