IOI Properties Group Berhad (KLSE:IOIPG) Takes On Some Risk With Its Use Of 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. We can see that IOI Properties Group Berhad (KLSE:IOIPG) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for IOI Properties Group Berhad

How Much Debt Does IOI Properties Group Berhad Carry?

As you can see below, IOI Properties Group Berhad had RM18.2b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has RM2.21b in cash leading to net debt of about RM16.0b.

How Healthy Is IOI Properties Group Berhad's Balance Sheet?

According to the last reported balance sheet, IOI Properties Group Berhad had liabilities of RM3.18b due within 12 months, and liabilities of RM17.7b due beyond 12 months. Offsetting these obligations, it had cash of RM2.21b as well as receivables valued at RM761.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM18.0b.

This deficit casts a shadow over the RM11.6b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, IOI Properties Group Berhad would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Strangely IOI Properties Group Berhad has a sky high EBITDA ratio of 6.6, implying high debt, but a strong interest coverage of 27.0. So either it has access to very cheap long term debt or that interest expense is going to grow! Pleasingly, IOI Properties Group Berhad is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 186% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if IOI Properties Group Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, IOI Properties Group Berhad created free cash flow amounting to 15% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

To be frank both IOI Properties Group Berhad's level of total liabilities and its track record of managing its debt, based on its EBITDA, make us rather uncomfortable with its debt levels. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that IOI Properties Group Berhad's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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. For instance, we've identified 3 warning signs for IOI Properties Group Berhad (2 can't be ignored) 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.