Is Parkwood Holdings Berhad (KLSE:PARKWD) A Risky Investment?

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.' 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. Importantly, Parkwood Holdings Berhad (KLSE:PARKWD) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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.

See our latest analysis for Parkwood Holdings Berhad

What Is Parkwood Holdings Berhad's Net Debt?

As you can see below, Parkwood Holdings Berhad had RM25.6m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has RM30.0m in cash, leading to a RM4.32m net cash position.

A Look At Parkwood Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Parkwood Holdings Berhad had liabilities of RM3.65m due within 12 months and liabilities of RM26.3m due beyond that. Offsetting this, it had RM30.0m in cash and RM8.17m in receivables that were due within 12 months. So it can boast RM8.17m more liquid assets than total liabilities.

This excess liquidity suggests that Parkwood Holdings Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Parkwood Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Parkwood Holdings Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Parkwood Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 82%, to RM9.5m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Parkwood Holdings Berhad?

Although Parkwood Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM20m. 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. We think its revenue growth of 82% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Parkwood Holdings Berhad (of which 2 are significant!) 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.

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.

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