Health Check: How Prudently Does PNE PCB Berhad (KLSE:PNEPCB) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that PNE PCB Berhad (KLSE:PNEPCB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for PNE PCB Berhad

How Much Debt Does PNE PCB Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 PNE PCB Berhad had RM7.95m of debt, an increase on RM1.64m, over one year. However, its balance sheet shows it holds RM22.4m in cash, so it actually has RM14.5m net cash.

How Healthy Is PNE PCB Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PNE PCB Berhad had liabilities of RM25.7m due within 12 months and liabilities of RM11.3m due beyond that. Offsetting this, it had RM22.4m in cash and RM47.1m in receivables that were due within 12 months. So it can boast RM32.4m more liquid assets than total liabilities.

This surplus liquidity suggests that PNE PCB Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that PNE PCB Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is PNE PCB 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.

Over 12 months, PNE PCB Berhad reported revenue of RM80m, which is a gain of 23%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is PNE PCB 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 PNE PCB Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM32m and booked a RM4.8m accounting loss. But the saving grace is the RM14.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. PNE PCB 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 5 warning signs for PNE PCB Berhad (3 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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