Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Pelikan International Corporation Berhad (KLSE: PELIKAN) uses debt. But should shareholders worry about its use of debt?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest review for Pelikan International Corporation Berhad
How much debt does Pelikan International Corporation Berhad have?
The image below, which you can click on for more details, shows that Pelikan International Corporation Berhad had debt of RM132.6 million at the end of December 2021, a reduction from RM398.2 million on a year. But on the other hand, he also has RM188.6 million in cash which leads to a net cash position of RM56.0 million.
How strong is Pelikan International Corporation Berhad’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Pelikan International Corporation Berhad had liabilities of RM477.6 million due within 12 months and liabilities of RM357.4 million due beyond. On the other hand, it had cash of RM188.6 million and RM243.8 million of receivables due within one year. It therefore has liabilities totaling RM402.6 million more than its cash and short-term receivables, combined.
This deficit casts a shadow over the RM147.8m company, like a towering colossus of mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, Pelikan International Corporation Berhad would likely need a major recapitalization if its creditors were to demand repayment. Since Pelikan International Corporation Berhad has more cash than debt, we are quite confident that it can manage its debt, despite having a lot of debt in total.
Even better, Pelikan International Corporation Berhad increased its EBIT by 343% last year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Pelikan International Corporation Berhad will need income to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Pelikan International Corporation Berhad may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Over the last three years, Pelikan International Corporation Berhad has recorded a free cash flow of 23% of its EBIT, which is lower than expected. It’s not great when it comes to paying off debt.
Although Pelikan International Corporation Berhad has more debt than liquid assets, it also has a net cash position of RM56.0 million. And we liked the look of EBIT growth of 343% YoY last year. So, while we see some areas for improvement, we are not overly concerned about Pelikan International Corporation Berhad’s balance sheet. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Pelikan International Corporation Berhad (of which 1 is worrying!) that you should know about.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.