Is Plenitude Berhad (KLSE:PLENITU) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Plenitude Berhad (KLSE:PLENITU) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Plenitude Berhad

What Is Plenitude Berhad's Debt?

The image below, which you can click on for greater detail, shows that Plenitude Berhad had debt of RM340.1m at the end of June 2022, a reduction from RM369.0m over a year. But it also has RM405.9m in cash to offset that, meaning it has RM65.8m net cash.

A Look At Plenitude Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Plenitude Berhad had liabilities of RM252.7m due within 12 months and liabilities of RM263.5m due beyond that. On the other hand, it had cash of RM405.9m and RM79.4m worth of receivables due within a year. So its liabilities total RM31.0m more than the combination of its cash and short-term receivables.

Of course, Plenitude Berhad has a market capitalization of RM419.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Plenitude Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Pleasingly, Plenitude Berhad is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 178% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Plenitude 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Plenitude 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. During the last three years, Plenitude Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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 RM65.8m. And it impressed us with its EBIT growth of 178% over the last year. So we don't have any problem with Plenitude Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Plenitude Berhad (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.