Is Fraser & Neave Holdings Bhd (KLSE:F&N) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Fraser & Neave Holdings Bhd (KLSE:F&N) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fraser & Neave Holdings Bhd

What Is Fraser & Neave Holdings Bhd's Debt?

As you can see below, at the end of June 2022, Fraser & Neave Holdings Bhd had RM120.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has RM374.6m in cash, leading to a RM254.6m net cash position.

How Healthy Is Fraser & Neave Holdings Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fraser & Neave Holdings Bhd had liabilities of RM859.4m due within 12 months and liabilities of RM170.7m due beyond that. Offsetting this, it had RM374.6m in cash and RM727.9m in receivables that were due within 12 months. So it can boast RM72.4m more liquid assets than total liabilities.

Having regard to Fraser & Neave Holdings Bhd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the RM8.07b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Fraser & Neave Holdings Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Fraser & Neave Holdings Bhd if management cannot prevent a repeat of the 25% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Fraser & Neave Holdings Bhd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Fraser & Neave Holdings Bhd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Fraser & Neave Holdings Bhd produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fraser & Neave Holdings Bhd has net cash of RM254.6m, as well as more liquid assets than liabilities. So we don't have any problem with Fraser & Neave Holdings Bhd's use of debt. 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 Fraser & Neave Holdings Bhd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.