Is Fraser & Neave Holdings Bhd (KLSE:F&N) Using Too Much Debt?

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. Importantly, Fraser & Neave Holdings Bhd (KLSE:F&N) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Fraser & Neave Holdings Bhd

What Is Fraser & Neave Holdings Bhd's Debt?

As you can see below, Fraser & Neave Holdings Bhd had RM80.6m of debt at December 2020, down from RM109.5m a year prior. But on the other hand it also has RM680.0m in cash, leading to a RM599.4m net cash position.

How Strong 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 RM782.2m due within 12 months and liabilities of RM117.4m due beyond that. On the other hand, it had cash of RM680.0m and RM655.9m worth of receivables due within a year. So it actually has RM436.3m more liquid assets than total liabilities.

This surplus suggests that Fraser & Neave Holdings Bhd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Fraser & Neave Holdings Bhd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Fraser & Neave Holdings Bhd saw its EBIT drop by 2.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Fraser & Neave Holdings Bhd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Fraser & Neave Holdings Bhd recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Fraser & Neave Holdings Bhd has RM599.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM419m, being 75% of its EBIT. So is Fraser & Neave Holdings Bhd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Fraser & Neave Holdings Bhd .

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. 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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