Fajarbaru Builder Group Bhd (KLSE:FAJAR) Could Easily Take On More Debt

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 note that Fajarbaru Builder Group Bhd. (KLSE:FAJAR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Fajarbaru Builder Group Bhd

How Much Debt Does Fajarbaru Builder Group Bhd Carry?

The image below, which you can click on for greater detail, shows that Fajarbaru Builder Group Bhd had debt of RM27.5m at the end of June 2020, a reduction from RM57.7m over a year. However, it does have RM70.5m in cash offsetting this, leading to net cash of RM43.0m.

A Look At Fajarbaru Builder Group Bhd's Liabilities

The latest balance sheet data shows that Fajarbaru Builder Group Bhd had liabilities of RM108.0m due within a year, and liabilities of RM10.3m falling due after that. On the other hand, it had cash of RM70.5m and RM120.4m worth of receivables due within a year. So it actually has RM72.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Fajarbaru Builder Group Bhd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. 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.

On the other hand, Fajarbaru Builder Group Bhd saw its EBIT drop by 8.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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. Over the last three years, Fajarbaru Builder Group Bhd recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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 RM43.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in RM67m. So we don't think Fajarbaru Builder Group Bhd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Fajarbaru Builder Group Bhd 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. 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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