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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Fraser & Neave Holdings Bhd (KLSE:F&N) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 September 2022, Fraser & Neave Holdings Bhd had RM246.8m of debt, up from RM1.00m a year ago. Click the image for more detail. But on the other hand it also has RM461.9m in cash, leading to a RM215.1m net cash position.

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

According to the last reported balance sheet, Fraser & Neave Holdings Bhd had liabilities of RM833.3m due within 12 months, and liabilities of RM372.9m due beyond 12 months. Offsetting this, it had RM461.9m in cash and RM866.4m in receivables that were due within 12 months. So it can boast RM122.0m 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 it's very unlikely that the RM8.11b company is short on cash, but still worth keeping an eye on the balance sheet. 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 5.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fraser & Neave Holdings Bhd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, Fraser & Neave Holdings Bhd's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 RM215.1m, as well as more liquid assets than liabilities. So we don't have any problem with Fraser & Neave Holdings Bhd's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Fraser & Neave Holdings Bhd has 1 warning sign we think you should be aware of.

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. 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.