Plenitude Berhad (KLSE:PLENITU) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Plenitude Berhad (KLSE:PLENITU) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Plenitude Berhad

What Is Plenitude Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Plenitude Berhad had RM341.6m in debt in June 2023; about the same as the year before. However, its balance sheet shows it holds RM426.8m in cash, so it actually has RM85.2m net cash.

How Healthy Is Plenitude Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Plenitude Berhad had liabilities of RM336.8m due within 12 months and liabilities of RM218.6m due beyond that. Offsetting these obligations, it had cash of RM426.8m as well as receivables valued at RM115.9m due within 12 months. So it has liabilities totalling RM12.6m more than its cash and near-term receivables, combined.

Given Plenitude Berhad has a market capitalization of RM442.6m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Plenitude Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Plenitude Berhad grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Plenitude 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Plenitude 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 last three years, Plenitude Berhad reported free cash flow worth 14% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about Plenitude Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM85.2m. And we liked the look of last year's 37% year-on-year EBIT growth. So we are not troubled with Plenitude Berhad's debt use. 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. Case in point: We've spotted 2 warning signs for Plenitude Berhad you should be aware of, and 1 of them shouldn't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.