PeterLabs Holdings Berhad (KLSE:PLABS) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that PeterLabs Holdings Berhad (KLSE:PLABS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for PeterLabs Holdings Berhad

How Much Debt Does PeterLabs Holdings Berhad Carry?

The chart below, which you can click on for greater detail, shows that PeterLabs Holdings Berhad had RM14.0m in debt in June 2023; about the same as the year before. But on the other hand it also has RM15.1m in cash, leading to a RM1.05m net cash position.

How Strong Is PeterLabs Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, PeterLabs Holdings Berhad had liabilities of RM26.9m due within 12 months, and liabilities of RM4.10m due beyond 12 months. Offsetting this, it had RM15.1m in cash and RM42.1m in receivables that were due within 12 months. So it can boast RM26.1m 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. Succinctly put, PeterLabs Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact PeterLabs Holdings Berhad's saving grace is its low debt levels, because its EBIT has tanked 53% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is PeterLabs Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, PeterLabs Holdings Berhad recorded free cash flow worth 67% 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 we empathize with investors who find debt concerning, you should keep in mind that PeterLabs Holdings Berhad has net cash of RM1.05m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM3.2m, being 67% of its EBIT. So we don't have any problem with PeterLabs Holdings Berhad's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for PeterLabs Holdings Berhad you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.