Pos Malaysia Berhad (KLSE:POS) Has Debt But No Earnings; Should You Worry?

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. We can see that Pos Malaysia Berhad (KLSE:POS) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Pos Malaysia Berhad

What Is Pos Malaysia Berhad's Net Debt?

As you can see below, at the end of June 2021, Pos Malaysia Berhad had RM710.7m of debt, up from RM602.0m a year ago. Click the image for more detail. However, it also had RM343.9m in cash, and so its net debt is RM366.8m.

A Look At Pos Malaysia Berhad's Liabilities

The latest balance sheet data shows that Pos Malaysia Berhad had liabilities of RM1.44b due within a year, and liabilities of RM564.7m falling due after that. Offsetting this, it had RM343.9m in cash and RM966.9m in receivables that were due within 12 months. So it has liabilities totalling RM690.0m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of RM598.8m, 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.

Over 12 months, Pos Malaysia Berhad saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Pos Malaysia Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM312m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through RM78m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Pos Malaysia Berhad's profit, revenue, and operating cashflow have changed over the last few years.

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.

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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