IOI Properties Group Berhad (KLSE:IOIPG) Use Of Debt Could Be Considered Risky

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 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 note that IOI Properties Group Berhad (KLSE:IOIPG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is IOI Properties Group Berhad's Debt?

As you can see below, IOI Properties Group Berhad had RM19.6b of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. However, it also had RM2.66b in cash, and so its net debt is RM16.9b.

A Look At IOI Properties Group Berhad's Liabilities

According to the last reported balance sheet, IOI Properties Group Berhad had liabilities of RM4.49b due within 12 months, and liabilities of RM17.9b due beyond 12 months. On the other hand, it had cash of RM2.66b and RM635.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM19.1b.

This deficit casts a shadow over the RM12.0b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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.

With a net debt to EBITDA ratio of 9.3, it's fair to say IOI Properties Group Berhad does have a significant amount of debt. However, its interest coverage of 4.5 is reasonably strong, which is a good sign. Shareholders should be aware that IOI Properties Group Berhad's EBIT was down 22% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, IOI Properties Group Berhad recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, IOI Properties Group Berhad's net debt to EBITDA left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to convert EBIT to free cash flow isn't such a worry. Taking into account all the aforementioned factors, it looks like IOI Properties Group Berhad has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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 example, we've discovered 4 warning signs for IOI Properties Group Berhad (2 can't be ignored!) 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.