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. Importantly, FITTERS Diversified Berhad (KLSE:FITTERS) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for FITTERS Diversified Berhad

What Is FITTERS Diversified Berhad's Debt?

As you can see below, FITTERS Diversified Berhad had RM26.2m of debt at June 2024, down from RM32.7m a year prior. But on the other hand it also has RM165.2m in cash, leading to a RM139.0m net cash position.

How Strong 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 RM86.4m due within 12 months and liabilities of RM5.01m due beyond that. Offsetting these obligations, it had cash of RM165.2m as well as receivables valued at RM91.6m due within 12 months. So it actually has RM165.4m more liquid assets than total liabilities.

This luscious liquidity implies that FITTERS Diversified Berhad's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 it is FITTERS Diversified Berhad's earnings that will influence how the balance sheet holds up in the future. 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 9.3%, to RM324m. We would much prefer see growth.

So How Risky Is FITTERS Diversified Berhad?

Although FITTERS Diversified Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM7.9m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The next few years will be important as the business matures. 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 3 warning signs (and 2 which are concerning) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.