Here's Why PBA Holdings Bhd (KLSE:PBA) Can Manage Its Debt Responsibly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that PBA Holdings Bhd (KLSE:PBA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for PBA Holdings Bhd

How Much Debt Does PBA Holdings Bhd Carry?

The image below, which you can click on for greater detail, shows that PBA Holdings Bhd had debt of RM23.0m at the end of March 2021, a reduction from RM60.9m over a year. However, it does have RM119.0m in cash offsetting this, leading to net cash of RM95.9m.

How Strong Is PBA Holdings Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PBA Holdings Bhd had liabilities of RM192.9m due within 12 months and liabilities of RM560.2m due beyond that. Offsetting these obligations, it had cash of RM119.0m as well as receivables valued at RM26.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM607.8m.

This deficit casts a shadow over the RM281.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, PBA Holdings Bhd would probably need a major re-capitalization if its creditors were to demand repayment. Given that PBA Holdings Bhd has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

It is well worth noting that PBA Holdings Bhd's EBIT shot up like bamboo after rain, gaining 52% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. During the last three years, PBA Holdings Bhd generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While PBA Holdings Bhd does have more liabilities than liquid assets, it also has net cash of RM95.9m. And it impressed us with free cash flow of RM30m, being 83% of its EBIT. 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. For example PBA Holdings Bhd has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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