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

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. Importantly, Fajarbaru Builder Group Bhd. (KLSE:FAJAR) does carry debt. But should shareholders be worried about its use of debt?

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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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Fajarbaru Builder Group Bhd Carry?

As you can see below, at the end of December 2024, Fajarbaru Builder Group Bhd had RM65.1m of debt, up from RM51.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM76.6m in cash, so it actually has RM11.5m net cash.

A Look At Fajarbaru Builder Group Bhd's Liabilities

Zooming in on the latest balance sheet data, we can see that Fajarbaru Builder Group Bhd had liabilities of RM227.8m due within 12 months and liabilities of RM30.6m due beyond that. Offsetting these obligations, it had cash of RM76.6m as well as receivables valued at RM369.8m due within 12 months. So it can boast RM188.0m more liquid assets than total liabilities.

This surplus strongly suggests that Fajarbaru Builder Group Bhd has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Fajarbaru Builder Group Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Fajarbaru Builder Group Bhd

Better yet, Fajarbaru Builder Group Bhd grew its EBIT by 2,028% 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Fajarbaru Builder Group Bhd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fajarbaru Builder Group Bhd has RM11.5m in net cash and a strong balance sheet. And we liked the look of last year's 2,028% 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. For instance, we've identified 4 warning signs for Fajarbaru Builder Group Bhd (2 can't be ignored) you should be aware of.

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.