Does PBA Holdings Bhd (KLSE:PBA) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, PBA Holdings Bhd (KLSE:PBA) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for PBA Holdings Bhd

What Is PBA Holdings Bhd's Net Debt?

The image below, which you can click on for greater detail, shows that PBA Holdings Bhd had debt of RM20.1m at the end of September 2023, a reduction from RM21.1m over a year. However, its balance sheet shows it holds RM213.0m in cash, so it actually has RM192.9m net cash.

A Look At PBA Holdings Bhd's Liabilities

According to the last reported balance sheet, PBA Holdings Bhd had liabilities of RM208.3m due within 12 months, and liabilities of RM346.8m due beyond 12 months. Offsetting these obligations, it had cash of RM213.0m as well as receivables valued at RM53.3m due within 12 months. So its liabilities total RM288.8m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM370.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, PBA Holdings Bhd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly PBA Holdings Bhd's EBIT was essentially flat over the last twelve months. We would prefer to see some earnings growth, because that always helps diminish debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is PBA Holdings Bhd's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. PBA Holdings Bhd 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. Happily for any shareholders, PBA Holdings Bhd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although PBA Holdings Bhd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM192.9m. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in RM53m. So we don't have any problem with PBA Holdings Bhd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for PBA Holdings Bhd you should be aware of, and 1 of them is a bit unpleasant.

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.