Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that ABM Fujiya Berhad (KLSE: AFUJIYA) has debt on its balance sheet. But should shareholders worry about its use of debt?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for ABM Fujiya Berhad
How much debt does ABM Fujiya Berhad have?
You can click on the graph below for historical figures, but it shows that in March 2022, ABM Fujiya Berhad had debt of RM91.8 million, an increase from RM66.0 million, on a year. However, he has RM6.78 million in cash to offset this, resulting in a net debt of around RM85.0 million.
A Look at ABM Fujiya Berhad’s Responsibilities
According to the latest published balance sheet, ABM Fujiya Berhad had liabilities of RM142.9 million due within 12 months and liabilities of RM11.3 million due beyond 12 months. In return, he had RM6.78 million in cash and RM54.6 million in debt due within 12 months. Thus, its liabilities total RM92.8 million more than the combination of its cash and short-term receivables.
Given that this deficit is actually greater than the company’s market capitalization of RM64.8 million, we think shareholders should really be watching ABM Fujiya Berhad’s debt levels, like a parent watching their child. riding a bike for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Low interest coverage of 1.3x and an extremely high net debt to EBITDA ratio of 8.2 shook our confidence in ABM Fujiya Berhad like a punch in the gut. The debt burden here is considerable. Worse still, ABM Fujiya Berhad’s EBIT is down 43% from a year ago. If earnings continue to follow this trajectory, paying off this debt will be more difficult than convincing us to run a marathon in the rain. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; because ABM Fujiya Berhad will need income to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, ABM Fujiya Berhad has recorded negative free cash flow, in total. Debt is generally more expensive and almost always riskier in the hands of a company with negative free cash flow. Shareholders should hope for an improvement.
Our point of view
To be frank, ABM Fujiya Berhad’s net debt to EBITDA ratio and its history of (non-)growth in its EBIT make us rather uncomfortable with its debt levels. Moreover, his level of total liabilities also fails to inspire confidence. Considering everything we mentioned above, it is fair to say that ABM Fujiya Berhad is heavily indebted. If you harvest honey without a bee costume, you might get stung, so we’ll probably stay away from that particular stock. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we found 4 warning signs for ABM Fujiya Berhad (3 are concerning!) that you should be aware of before investing here.
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.
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