Is Ivory Properties Group Berhad (KLSE:IVORY) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ivory Properties Group Berhad (KLSE:IVORY) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Ivory Properties Group Berhad

What Is Ivory Properties Group Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Ivory Properties Group Berhad had RM128.6m of debt, an increase on RM116.3m, over one year. However, it also had RM17.5m in cash, and so its net debt is RM111.1m.

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

Zooming in on the latest balance sheet data, we can see that Ivory Properties Group Berhad had liabilities of RM243.6m due within 12 months and liabilities of RM218.2m due beyond that. Offsetting this, it had RM17.5m in cash and RM39.1m in receivables that were due within 12 months. So it has liabilities totalling RM405.2m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM34.3m 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, Ivory Properties Group Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Ivory Properties Group Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

While it hasn't made a profit, at least Ivory Properties Group Berhad booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months Ivory Properties Group Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM69m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated RM9.1m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Ivory Properties Group Berhad (2 are a bit concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.