Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Furniweb Holdings Limited (HKG:8480) does carry 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Furniweb Holdings's Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Furniweb Holdings had debt of RM20.4m, up from RM8.98m in one year. But on the other hand it also has RM59.0m in cash, leading to a RM38.6m net cash position.
How Strong Is Furniweb Holdings' Balance Sheet?
The latest balance sheet data shows that Furniweb Holdings had liabilities of RM59.1m due within a year, and liabilities of RM17.5m falling due after that. On the other hand, it had cash of RM59.0m and RM53.4m worth of receivables due within a year. So it can boast RM35.7m more liquid assets than total liabilities.
This excess liquidity is a great indication that Furniweb Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Furniweb Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Furniweb Holdings grew its EBIT by 1,936% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Furniweb Holdings 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Furniweb Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Furniweb Holdings produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case Furniweb Holdings has RM38.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 1,936% over the last year. So is Furniweb Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Furniweb Holdings that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
Furniweb Holdings Limited, an investment holding company, manufactures and sells elastic textile, webbings, and polyvinyl chloride (PVC) related products in Malaysia, Vietnam, rest of the Asia Pacific, Europe, North America, and internationally.
Excellent balance sheet and good value.