Is Furniweb Holdings (HKG:8480) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Furniweb Holdings Limited (HKG:8480) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Furniweb Holdings

What Is Furniweb Holdings's Debt?

The chart below, which you can click on for greater detail, shows that Furniweb Holdings had RM11.7m in debt in June 2020; about the same as the year before. However, it does have RM25.5m in cash offsetting this, leading to net cash of RM13.8m.

How Healthy Is Furniweb Holdings's Balance Sheet?

According to the last reported balance sheet, Furniweb Holdings had liabilities of RM28.0m due within 12 months, and liabilities of RM26.5m due beyond 12 months. Offsetting these obligations, it had cash of RM25.5m as well as receivables valued at RM34.8m due within 12 months. So it can boast RM5.71m more liquid assets than total liabilities.

This surplus suggests that Furniweb Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Furniweb Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Furniweb Holdings grew its EBIT by 95% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Furniweb 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Furniweb Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Furniweb Holdings saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Furniweb Holdings has RM13.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 95% over the last year. So we are not troubled with Furniweb Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Furniweb Holdings has 3 warning signs (and 1 which is concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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