Here's Why Pasdec Holdings Berhad (KLSE:PASDEC) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Pasdec Holdings Berhad (KLSE:PASDEC) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

How Much Debt Does Pasdec Holdings Berhad Carry?

As you can see below, at the end of March 2025, Pasdec Holdings Berhad had RM10.5m of debt, up from RM566.0k a year ago. Click the image for more detail. However, its balance sheet shows it holds RM15.1m in cash, so it actually has RM4.64m net cash.

How Strong Is Pasdec Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Pasdec Holdings Berhad had liabilities of RM24.8m due within a year, and liabilities of RM11.3m falling due after that. On the other hand, it had cash of RM15.1m and RM23.2m worth of receivables due within a year. So it actually has RM2.21m more liquid assets than total liabilities.

This short term liquidity is a sign that Pasdec Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Pasdec Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

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Better yet, Pasdec Holdings Berhad grew its EBIT by 362% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Pasdec Holdings 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Pasdec Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Pasdec Holdings Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Pasdec Holdings Berhad has RM4.64m in net cash and a decent-looking balance sheet. And we liked the look of last year's 362% year-on-year EBIT growth. So we are not troubled with Pasdec Holdings Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Pasdec Holdings Berhad , and understanding them should be part of your investment process.

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.

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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.