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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Fajarbaru Builder Group Bhd. (KLSE:FAJAR) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Fajarbaru Builder Group Bhd

What Is Fajarbaru Builder Group Bhd's Net Debt?

As you can see below, Fajarbaru Builder Group Bhd had RM49.9m of debt at March 2024, down from RM78.3m a year prior. However, its balance sheet shows it holds RM132.9m in cash, so it actually has RM83.0m net cash.

How Healthy Is Fajarbaru Builder Group Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fajarbaru Builder Group Bhd had liabilities of RM154.6m due within 12 months and liabilities of RM19.5m due beyond that. Offsetting these obligations, it had cash of RM132.9m as well as receivables valued at RM201.6m due within 12 months. So it can boast RM160.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Fajarbaru Builder Group Bhd's 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. Simply put, the fact that Fajarbaru Builder Group Bhd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Fajarbaru Builder Group Bhd grew its EBIT by 225% last year, which is an impressive improvement. 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 Fajarbaru Builder Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fajarbaru Builder Group Bhd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent two years, Fajarbaru Builder Group Bhd recorded free cash flow of 20% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fajarbaru Builder Group Bhd has RM83.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 225% year-on-year EBIT growth. So we don't think Fajarbaru Builder Group Bhd's use of debt 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Fajarbaru Builder Group Bhd (of which 1 shouldn't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com