We Think IOI Properties Group Berhad (KLSE:IOIPG) Is Taking Some Risk With Its 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, IOI Properties Group Berhad (KLSE:IOIPG) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is IOI Properties Group Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 IOI Properties Group Berhad had debt of RM19.6b, up from RM18.4b in one year. However, it does have RM2.10b in cash offsetting this, leading to net debt of about RM17.5b.

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

According to the last reported balance sheet, IOI Properties Group Berhad had liabilities of RM2.91b due within 12 months, and liabilities of RM19.3b due beyond 12 months. Offsetting this, it had RM2.10b in cash and RM765.9m in receivables that were due within 12 months. So it has liabilities totalling RM19.3b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM10.9b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, IOI Properties Group Berhad would probably need a major re-capitalization if its creditors were to demand repayment.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Strangely IOI Properties Group Berhad has a sky high EBITDA ratio of 6.9, implying high debt, but a strong interest coverage of 12.0. 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 221% 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, IOI Properties Group Berhad recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

To be frank both IOI Properties Group Berhad's net debt to EBITDA and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate 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. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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, we've discovered 3 warning signs for IOI Properties Group Berhad (2 are potentially serious!) that you should be aware of before investing here.

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. 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.