Does Parkwood Holdings Berhad (KLSE:PARKWD) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Parkwood Holdings Berhad (KLSE:PARKWD) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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 Parkwood Holdings Berhad

What Is Parkwood Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Parkwood Holdings Berhad had RM23.7m of debt in December 2021, down from RM26.3m, one year before. But on the other hand it also has RM23.9m in cash, leading to a RM211.4k net cash position.

How Strong Is Parkwood Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Parkwood Holdings Berhad had liabilities of RM7.23m falling due within a year, and liabilities of RM23.7m due beyond that. Offsetting these obligations, it had cash of RM23.9m as well as receivables valued at RM7.85m due within 12 months. So it actually has RM863.6k more liquid assets than total liabilities.

Having regard to Parkwood Holdings Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the RM45.4m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Parkwood Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Parkwood 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.

In the last year Parkwood Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to RM9.9m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Parkwood Holdings Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Parkwood Holdings Berhad lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM6.8m of cash and made a loss of RM4.3m. But at least it has RM211.4k on the balance sheet to spend on growth, near-term. Parkwood Holdings Berhad's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we've discovered 4 warning signs for Parkwood Holdings Berhad (2 are a bit unpleasant!) that you should be aware of before investing here.

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.