BLD Plantation Bhd (KLSE:BLDPLNT) Seems To Use Debt Quite Sensibly
Warren Buffett famously said, '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 BLD Plantation Bhd. (KLSE:BLDPLNT) does have debt on its balance sheet. But is this debt a concern to shareholders?
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 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 think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for BLD Plantation Bhd
What Is BLD Plantation Bhd's Net Debt?
As you can see below, BLD Plantation Bhd had RM314.9m of debt at December 2020, down from RM362.0m a year prior. On the flip side, it has RM209.9m in cash leading to net debt of about RM104.9m.
A Look At BLD Plantation Bhd's Liabilities
Zooming in on the latest balance sheet data, we can see that BLD Plantation Bhd had liabilities of RM325.6m due within 12 months and liabilities of RM186.8m due beyond that. On the other hand, it had cash of RM209.9m and RM138.9m worth of receivables due within a year. So its liabilities total RM163.5m more than the combination of its cash and short-term receivables.
Of course, BLD Plantation Bhd has a market capitalization of RM886.4m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
BLD Plantation Bhd has a low net debt to EBITDA ratio of only 0.85. And its EBIT easily covers its interest expense, being 14.9 times the size. So we're pretty relaxed about its super-conservative use of debt. It was also good to see that despite losing money on the EBIT line last year, BLD Plantation Bhd turned things around in the last 12 months, delivering and EBIT of RM78m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since BLD Plantation Bhd 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, BLD Plantation Bhd actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Our View
The good news is that BLD Plantation Bhd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Looking at the bigger picture, we think BLD Plantation Bhd's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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. Case in point: We've spotted 1 warning sign for BLD Plantation Bhd you should be aware of.
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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Access Free AnalysisThis 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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About KLSE:BLDPLNT
BLD Plantation Bhd
An investment holding company, engages in palm oil business in Bangladesh, China, India, Korea, Malaysia, and internationally.
Flawless balance sheet with solid track record.