We Think BLD Plantation Bhd (KLSE:BLDPLNT) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies BLD Plantation Bhd. (KLSE:BLDPLNT) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for BLD Plantation Bhd

How Much Debt Does BLD Plantation Bhd Carry?

The chart below, which you can click on for greater detail, shows that BLD Plantation Bhd had RM375.6m in debt in September 2020; about the same as the year before. However, it does have RM193.2m in cash offsetting this, leading to net debt of about RM182.5m.

A Look At BLD Plantation Bhd's Liabilities

We can see from the most recent balance sheet that BLD Plantation Bhd had liabilities of RM398.9m falling due within a year, and liabilities of RM195.2m due beyond that. On the other hand, it had cash of RM193.2m and RM124.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM276.2m.

While this might seem like a lot, it is not so bad since BLD Plantation Bhd has a market capitalization of RM748.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

BLD Plantation Bhd's net debt to EBITDA ratio of about 1.6 suggests only moderate use of debt. And its strong interest cover of 10.6 times, makes us even more comfortable. Although BLD Plantation Bhd made a loss at the EBIT level, last year, it was also good to see that it generated RM65m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is BLD Plantation Bhd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Looking at the most recent year, BLD Plantation Bhd recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

When it comes to the balance sheet, the standout positive for BLD Plantation Bhd was the fact that it seems able to cover its interest expense with its EBIT confidently. However, our other observations weren't so heartening. For example, its level of total liabilities makes us a little nervous about its debt. When we consider all the factors mentioned above, we do feel a bit cautious about BLD Plantation Bhd's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for BLD Plantation Bhd that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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