Is PNE PCB Berhad (KLSE:PNEPCB) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies PNE PCB Berhad (KLSE:PNEPCB) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for PNE PCB Berhad

How Much Debt Does PNE PCB Berhad Carry?

As you can see below, at the end of December 2020, PNE PCB Berhad had RM8.00m of debt, up from none a year ago. Click the image for more detail. However, it does have RM13.8m in cash offsetting this, leading to net cash of RM5.82m.

How Strong 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 RM22.7m due within 12 months and liabilities of RM12.0m due beyond that. Offsetting this, it had RM13.8m in cash and RM37.9m in receivables that were due within 12 months. So it actually has RM17.0m more liquid assets than total liabilities.

It's good to see that PNE PCB Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, PNE PCB 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 PNE PCB 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 PNE PCB Berhad's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is PNE PCB Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year PNE PCB Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM31m of cash and made a loss of RM4.9m. But the saving grace is the RM5.82m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that PNE PCB Berhad is showing 5 warning signs in our investment analysis , and 3 of those don't sit too well with us...

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. 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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