Is Bina Puri Holdings Bhd (KLSE:BPURI) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Bina Puri Holdings Bhd (KLSE:BPURI) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Bina Puri Holdings Bhd

What Is Bina Puri Holdings Bhd's Debt?

As you can see below, Bina Puri Holdings Bhd had RM416.4m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of RM30.5m, its net debt is less, at about RM385.9m.

A Look At Bina Puri Holdings Bhd's Liabilities

We can see from the most recent balance sheet that Bina Puri Holdings Bhd had liabilities of RM530.0m falling due within a year, and liabilities of RM350.1m due beyond that. Offsetting this, it had RM30.5m in cash and RM503.5m in receivables that were due within 12 months. So its liabilities total RM346.1m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM72.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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.

Over 12 months, Bina Puri Holdings Bhd made a loss at the EBIT level, and saw its revenue drop to RM212m, which is a fall of 17%. That's not what we would hope to see.

Caveat Emptor

While Bina Puri Holdings Bhd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM69m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost RM93m 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Bina Puri Holdings Bhd (of which 2 make us uncomfortable!) you should know about.

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.