Is FITTERS Diversified Berhad (KLSE:FITTERS) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. 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?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for FITTERS Diversified Berhad

What Is FITTERS Diversified Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that FITTERS Diversified Berhad had debt of RM23.6m at the end of December 2023, a reduction from RM57.0m over a year. However, it does have RM155.1m in cash offsetting this, leading to net cash of RM131.5m.

A Look At FITTERS Diversified Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that FITTERS Diversified Berhad had liabilities of RM80.2m due within 12 months and liabilities of RM5.14m due beyond that. Offsetting this, it had RM155.1m in cash and RM108.0m in receivables that were due within 12 months. So it actually has RM177.7m 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. 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 FITTERS Diversified Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year FITTERS Diversified Berhad had a loss before interest and tax, and actually shrunk its revenue by 28%, to RM304m. To be frank that doesn't bode well.

So How Risky Is FITTERS Diversified Berhad?

While FITTERS Diversified Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM19m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that FITTERS Diversified Berhad is showing 4 warning signs in our investment analysis , and 3 of those are significant...

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.