Is FITTERS Diversified Berhad (KLSE:FITTERS) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, FITTERS Diversified Berhad (KLSE:FITTERS) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out 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 RM32.7m at the end of June 2023, a reduction from RM77.3m over a year. But on the other hand it also has RM158.7m in cash, leading to a RM126.0m 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 RM96.6m due within a year, and liabilities of RM4.76m falling due after that. Offsetting these obligations, it had cash of RM158.7m as well as receivables valued at RM100.1m due within 12 months. So it actually has RM157.5m more liquid assets than total liabilities.

This surplus strongly suggests that FITTERS Diversified Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, FITTERS Diversified Berhad made a loss at the EBIT level, and saw its revenue drop to RM358m, which is a fall of 12%. 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 RM22m. 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. There's no doubt the next few years will be crucial to how 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. Be aware that FITTERS Diversified Berhad is showing 4 warning signs in our investment analysis , and 3 of those are potentially serious...

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.