Is FITTERS Diversified Berhad (KLSE:FITTERS) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 RM42.8m of debt in March 2023, down from RM77.6m, one year before. But on the other hand it also has RM132.0m in cash, leading to a RM89.3m net cash position.

How Healthy Is FITTERS Diversified Berhad's Balance Sheet?

The latest balance sheet data shows that FITTERS Diversified Berhad had liabilities of RM199.1m due within a year, and liabilities of RM6.40m falling due after that. On the other hand, it had cash of RM132.0m and RM96.8m worth of receivables due within a year. So it actually has RM23.4m more liquid assets than total liabilities.

This excess liquidity suggests that FITTERS Diversified Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, FITTERS Diversified Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to RM415m. We usually like to see faster growth from unprofitable companies, but each to their own.

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 RM23m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with FITTERS Diversified Berhad (at least 3 which are significant) , and understanding them should be part of your investment process.

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.