Is Pos Malaysia Berhad (KLSE:POS) Using Debt Sensibly?

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.' 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. As with many other companies Pos Malaysia Berhad (KLSE:POS) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Pos Malaysia Berhad

What Is Pos Malaysia Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Pos Malaysia Berhad had RM720.9m in debt in June 2022; about the same as the year before. On the flip side, it has RM232.6m in cash leading to net debt of about RM488.3m.

How Healthy Is Pos Malaysia Berhad's Balance Sheet?

The latest balance sheet data shows that Pos Malaysia Berhad had liabilities of RM1.37b due within a year, and liabilities of RM411.1m falling due after that. On the other hand, it had cash of RM232.6m and RM933.4m worth of receivables due within a year. So it has liabilities totalling RM617.2m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of RM473.6m, we think shareholders really should watch Pos Malaysia Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pos Malaysia Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Pos Malaysia Berhad had a loss before interest and tax, and actually shrunk its revenue by 10%, to RM2.1b. We would much prefer see growth.

Caveat Emptor

While Pos Malaysia Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM103m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through RM9.4m in negative free cash flow over the last year. That means it's on the risky side of things. 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 1 warning sign with Pos Malaysia Berhad , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.