Is PeterLabs Holdings Berhad (KLSE:PLABS) A Risky Investment?

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 PeterLabs Holdings Berhad (KLSE:PLABS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PeterLabs Holdings Berhad

What Is PeterLabs Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that PeterLabs Holdings Berhad had debt of RM10.9m at the end of September 2022, a reduction from RM21.1m over a year. But it also has RM12.2m in cash to offset that, meaning it has RM1.27m net cash.

How Healthy Is PeterLabs Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, PeterLabs Holdings Berhad had liabilities of RM25.4m due within 12 months, and liabilities of RM4.70m due beyond 12 months. On the other hand, it had cash of RM12.2m and RM43.2m worth of receivables due within a year. So it actually has RM25.3m more liquid assets than total liabilities.

This surplus strongly suggests that PeterLabs Holdings Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that PeterLabs Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, PeterLabs Holdings Berhad grew its EBIT by 2.6% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is PeterLabs 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 PeterLabs 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. Looking at the most recent three years, PeterLabs Holdings Berhad recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that PeterLabs Holdings Berhad has net cash of RM1.27m, as well as more liquid assets than liabilities. And it also grew its EBIT by 2.6% over the last year. So is PeterLabs Holdings Berhad's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for PeterLabs Holdings Berhad you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.