Does Fajarbaru Builder Group Bhd (KLSE:FAJAR) Have A Healthy Balance Sheet?

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.' 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 Fajarbaru Builder Group Bhd. (KLSE:FAJAR) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Fajarbaru Builder Group Bhd

What Is Fajarbaru Builder Group Bhd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Fajarbaru Builder Group Bhd had RM42.4m of debt in December 2020, down from RM72.1m, one year before. However, its balance sheet shows it holds RM69.5m in cash, so it actually has RM27.1m net cash.

A Look At Fajarbaru Builder Group Bhd's Liabilities

We can see from the most recent balance sheet that Fajarbaru Builder Group Bhd had liabilities of RM97.7m falling due within a year, and liabilities of RM11.4m due beyond that. On the other hand, it had cash of RM69.5m and RM128.8m worth of receivables due within a year. So it actually has RM89.2m more liquid assets than total liabilities.

This luscious liquidity implies that Fajarbaru Builder Group Bhd's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Fajarbaru Builder Group Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Fajarbaru Builder Group Bhd if management cannot prevent a repeat of the 72% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Fajarbaru Builder Group Bhd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fajarbaru Builder Group Bhd 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, Fajarbaru Builder Group Bhd generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Fajarbaru Builder Group Bhd has net cash of RM27.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM53m, being 89% of its EBIT. So is Fajarbaru Builder Group Bhd's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Fajarbaru Builder Group Bhd 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. 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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