Is Boustead Holdings Berhad (KLSE:BSTEAD) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Boustead Holdings Berhad (KLSE:BSTEAD) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Boustead Holdings Berhad

What Is Boustead Holdings Berhad's Net Debt?

As you can see below, Boustead Holdings Berhad had RM7.70b of debt at September 2020, down from RM8.19b a year prior. However, because it has a cash reserve of RM531.2m, its net debt is less, at about RM7.17b.

A Look At Boustead Holdings Berhad's Liabilities

According to the last reported balance sheet, Boustead Holdings Berhad had liabilities of RM7.45b due within 12 months, and liabilities of RM3.66b due beyond 12 months. Offsetting this, it had RM531.2m in cash and RM2.05b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM8.53b.

This deficit casts a shadow over the RM1.27b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Boustead Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. 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 Boustead Holdings Berhad 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 Boustead Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 23%, to RM8.2b. That makes us nervous, to say the least.

Caveat Emptor

While Boustead Holdings Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM43m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost RM1.3b in the last year. So we think buying this stock is 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Boustead Holdings Berhad you should know about.

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. 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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