We Think Bintulu Port Holdings Berhad (KLSE:BIPORT) Can Stay On Top Of Its Debt

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. As with many other companies Bintulu Port Holdings Berhad (KLSE:BIPORT) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Bintulu Port Holdings Berhad

How Much Debt Does Bintulu Port Holdings Berhad Carry?

The chart below, which you can click on for greater detail, shows that Bintulu Port Holdings Berhad had RM940.7m in debt in March 2021; about the same as the year before. However, it does have RM974.4m in cash offsetting this, leading to net cash of RM33.7m.

How Healthy Is Bintulu Port Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bintulu Port Holdings Berhad had liabilities of RM234.5m due within 12 months and liabilities of RM1.34b due beyond that. Offsetting these obligations, it had cash of RM974.4m as well as receivables valued at RM67.9m due within 12 months. So its liabilities total RM535.0m more than the combination of its cash and short-term receivables.

Bintulu Port Holdings Berhad has a market capitalization of RM2.12b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Bintulu Port Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Bintulu Port Holdings Berhad's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Bintulu Port Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Bintulu Port Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Bintulu Port Holdings Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Bintulu Port Holdings Berhad does have more liabilities than liquid assets, it also has net cash of RM33.7m. And it impressed us with free cash flow of RM330m, being 157% of its EBIT. So we don't have any problem with Bintulu Port Holdings Berhad's use of debt. 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. We've identified 3 warning signs with Bintulu Port Holdings Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.

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.
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