Here's Why FITTERS Diversified Berhad (KLSE:FITTERS) Can Afford Some Debt

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 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 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for FITTERS Diversified Berhad

What Is FITTERS Diversified Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that FITTERS Diversified Berhad had RM86.7m of debt in March 2021, down from RM94.7m, one year before. However, it does have RM22.8m in cash offsetting this, leading to net debt of about RM63.9m.

How Healthy Is FITTERS Diversified Berhad's Balance Sheet?

The latest balance sheet data shows that FITTERS Diversified Berhad had liabilities of RM129.2m due within a year, and liabilities of RM18.7m falling due after that. Offsetting this, it had RM22.8m in cash and RM89.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM35.7m.

This deficit isn't so bad because FITTERS Diversified Berhad is worth RM159.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since FITTERS Diversified Berhad 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.

In the last year FITTERS Diversified Berhad had a loss before interest and tax, and actually shrunk its revenue by 10%, to RM222m. That's not what we would hope to see.

Caveat Emptor

While FITTERS Diversified Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM7.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM11m. In the meantime, we consider the stock very 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 3 warning signs for FITTERS Diversified Berhad (of which 1 is potentially serious!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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