Is Bina Puri Holdings Bhd (KLSE:BPURI) A Risky Investment?

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. We note that Bina Puri Holdings Bhd (KLSE:BPURI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bina Puri Holdings Bhd

How Much Debt Does Bina Puri Holdings Bhd Carry?

As you can see below, Bina Puri Holdings Bhd had RM417.3m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM35.1m in cash offsetting this, leading to net debt of about RM382.2m.

How Strong Is Bina Puri Holdings Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bina Puri Holdings Bhd had liabilities of RM689.1m due within 12 months and liabilities of RM164.6m due beyond that. Offsetting this, it had RM35.1m in cash and RM526.3m in receivables that were due within 12 months. So it has liabilities totalling RM292.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM63.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Bina Puri Holdings Bhd would likely require a major re-capitalisation if it had to pay its creditors today. 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 Bina Puri Holdings Bhd 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.

In the last year Bina Puri Holdings Bhd had a loss before interest and tax, and actually shrunk its revenue by 16%, to RM241m. We would much prefer see growth.

Caveat Emptor

Not only did Bina Puri Holdings Bhd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM40m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost RM66m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Bina Puri Holdings Bhd (2 can't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.