Is FITTERS Diversified Berhad (KLSE:FITTERS) Using Debt In A Risky Way?

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 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 real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is FITTERS Diversified Berhad's Net Debt?

As you can see below, FITTERS Diversified Berhad had RM16.7m of debt at December 2024, down from RM23.6m a year prior. But it also has RM168.3m in cash to offset that, meaning it has RM151.6m net cash.

How Healthy Is FITTERS Diversified Berhad's Balance Sheet?

According to the last reported balance sheet, FITTERS Diversified Berhad had liabilities of RM86.9m due within 12 months, and liabilities of RM5.38m due beyond 12 months. On the other hand, it had cash of RM168.3m and RM96.7m worth of receivables due within a year. So it can boast RM172.7m 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. Succinctly put, FITTERS Diversified Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

View our latest analysis for FITTERS Diversified Berhad

In the last year FITTERS Diversified Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to RM381m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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 RM16m. 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. Given it also grew revenue by 26% over the last year, we think there's a good chance the company is on track. So this may well be an interesting business to watch grow. 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 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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. 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.