Is Parkwood Holdings Berhad (KLSE:PARKWD) Using Debt Sensibly?

Warren Buffett famously said, '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. We can see that Parkwood Holdings Berhad (KLSE:PARKWD) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Parkwood Holdings Berhad

What Is Parkwood Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Parkwood Holdings Berhad had RM28.9m of debt, an increase on RM26.9m, over one year. However, its balance sheet shows it holds RM29.4m in cash, so it actually has RM439.1k net cash.

A Look At Parkwood Holdings Berhad's Liabilities

The latest balance sheet data shows that Parkwood Holdings Berhad had liabilities of RM15.1m due within a year, and liabilities of RM22.8m falling due after that. Offsetting these obligations, it had cash of RM29.4m as well as receivables valued at RM7.85m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Parkwood Holdings Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the RM35.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Parkwood Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Parkwood 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.

In the last year Parkwood Holdings Berhad's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Parkwood Holdings Berhad?

While Parkwood Holdings Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM9.1m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Parkwood Holdings Berhad that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.