Does Puncak Niaga Holdings Berhad (KLSE:PUNCAK) Have A Healthy Balance Sheet?

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 Puncak Niaga Holdings Berhad (KLSE:PUNCAK) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Puncak Niaga Holdings Berhad

What Is Puncak Niaga Holdings Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Puncak Niaga Holdings Berhad had RM1.18b in debt in March 2023; about the same as the year before. However, it also had RM251.6m in cash, and so its net debt is RM926.6m.

A Look At Puncak Niaga Holdings Berhad's Liabilities

We can see from the most recent balance sheet that Puncak Niaga Holdings Berhad had liabilities of RM434.7m falling due within a year, and liabilities of RM1.23b due beyond that. On the other hand, it had cash of RM251.6m and RM211.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM1.20b.

The deficiency here weighs heavily on the RM138.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Puncak Niaga Holdings Berhad would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Puncak Niaga Holdings Berhad shareholders face the double whammy of a high net debt to EBITDA ratio (10.7), and fairly weak interest coverage, since EBIT is just 1.0 times the interest expense. The debt burden here is substantial. Worse, Puncak Niaga Holdings Berhad's EBIT was down 22% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Puncak Niaga Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Considering the last three years, Puncak Niaga Holdings Berhad actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

To be frank both Puncak Niaga Holdings Berhad's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And even its net debt to EBITDA fails to inspire much confidence. It's also worth noting that Puncak Niaga Holdings Berhad is in the Water Utilities industry, which is often considered to be quite defensive. Considering everything we've mentioned above, it's fair to say that Puncak Niaga Holdings Berhad is carrying heavy debt load. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. 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. Be aware that Puncak Niaga Holdings Berhad is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.