Health Check: How Prudently Does Berjaya Land Berhad (KLSE:BJLAND) Use Debt?

By
Simply Wall St
Published
March 21, 2021
KLSE:BJLAND
Source: Shutterstock

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.' 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 Berjaya Land Berhad (KLSE:BJLAND) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Berjaya Land Berhad

How Much Debt Does Berjaya Land Berhad Carry?

As you can see below, Berjaya Land Berhad had RM3.08b of debt at December 2020, down from RM3.56b a year prior. However, it also had RM760.1m in cash, and so its net debt is RM2.32b.

debt-equity-history-analysis
KLSE:BJLAND Debt to Equity History March 22nd 2021

How Healthy Is Berjaya Land Berhad's Balance Sheet?

According to the last reported balance sheet, Berjaya Land Berhad had liabilities of RM2.85b due within 12 months, and liabilities of RM4.25b due beyond 12 months. On the other hand, it had cash of RM760.1m and RM1.93b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM4.41b.

The deficiency here weighs heavily on the RM934.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Berjaya Land Berhad would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Berjaya Land Berhad will need earnings to service that debt. 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 Berjaya Land Berhad had a loss before interest and tax, and actually shrunk its revenue by 13%, to RM5.0b. That's not what we would hope to see.

Caveat Emptor

While Berjaya Land Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM44m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of RM69m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Berjaya Land Berhad's profit, revenue, and operating cashflow have changed over the last few years.

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. 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.
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