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. 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. As with many other companies PSL Holdings Limited (SGX:BLL) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is PSL Holdings's Net Debt?
As you can see below, at the end of September 2019, PSL Holdings had S$2.13m of debt, up from S$2.0 a year ago. Click the image for more detail. But on the other hand it also has S$3.76m in cash, leading to a S$1.64m net cash position.
How Strong Is PSL Holdings's Balance Sheet?
We can see from the most recent balance sheet that PSL Holdings had liabilities of S$2.97m falling due within a year, and liabilities of S$6.60m due beyond that. Offsetting this, it had S$3.76m in cash and S$18.1m in receivables that were due within 12 months. So it actually has S$12.3m more liquid assets than total liabilities.
This surplus strongly suggests that PSL Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that PSL Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is PSL Holdings'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.
Over 12 months, PSL Holdings made a loss at the EBIT level, and saw its revenue drop to S$1.9m, which is a fall of 80%. To be frank that doesn't bode well.
So How Risky Is PSL Holdings?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that PSL Holdings had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of S$2.8m and booked a S$1.9m accounting loss. However, it has net cash of S$1.64m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like PSL Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.