FITTERS Diversified Berhad (KLSE:FITTERS) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that FITTERS Diversified Berhad (KLSE:FITTERS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for FITTERS Diversified Berhad

What Is FITTERS Diversified Berhad's Debt?

The image below, which you can click on for greater detail, shows that FITTERS Diversified Berhad had debt of RM77.6m at the end of March 2022, a reduction from RM86.7m over a year. However, it also had RM62.4m in cash, and so its net debt is RM15.1m.

How Healthy Is FITTERS Diversified Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FITTERS Diversified Berhad had liabilities of RM123.7m due within 12 months and liabilities of RM12.7m due beyond that. Offsetting this, it had RM62.4m in cash and RM105.5m in receivables that were due within 12 months. So it can boast RM31.5m more liquid assets than total liabilities.

This surplus liquidity suggests that FITTERS Diversified Berhad'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 as strong as an ox. When analysing debt levels, the balance sheet is the obvious place to start. But it is FITTERS Diversified Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, FITTERS Diversified Berhad reported revenue of RM363m, which is a gain of 64%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate FITTERS Diversified Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping RM24m. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example FITTERS Diversified Berhad has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.