IOI Properties Group Berhad (KLSE:IOIPG) Takes On Some Risk With Its Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that IOI Properties Group Berhad (KLSE:IOIPG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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. 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. 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.

What Is IOI Properties Group Berhad's Debt?

The chart below, which you can click on for greater detail, shows that IOI Properties Group Berhad had RM19.4b in debt in March 2025; about the same as the year before. However, because it has a cash reserve of RM1.72b, its net debt is less, at about RM17.7b.

A Look At IOI Properties Group Berhad's Liabilities

According to the last reported balance sheet, IOI Properties Group Berhad had liabilities of RM3.67b due within 12 months, and liabilities of RM18.4b due beyond 12 months. Offsetting these obligations, it had cash of RM1.72b as well as receivables valued at RM771.9m due within 12 months. So it has liabilities totalling RM19.5b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM11.9b 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.

See our latest analysis for IOI Properties Group Berhad

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

IOI Properties Group Berhad's net debt to EBITDA ratio is 7.0 which suggests rather high debt levels, but its interest cover of 7.6 times suggests the debt is easily serviced. Our best guess is that the company does indeed have significant debt obligations. Notably, IOI Properties Group Berhad's EBIT launched higher than Elon Musk, gaining a whopping 185% on last year. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, IOI Properties Group Berhad recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

IOI Properties Group Berhad's level of total liabilities and net debt to EBITDA definitely weigh on it, in our esteem. But the good news is it seems to be able to grow its EBIT with ease. When we consider all the factors discussed, it seems to us that IOI Properties Group Berhad is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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 3 warning signs for IOI Properties Group Berhad (2 are a bit concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.