Federal International (2000) (SGX:BDU) Is Making Moderate Use Of 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.' 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. Importantly, Federal International (2000) Ltd (SGX:BDU) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Federal International (2000)

What Is Federal International (2000)'s Debt?

The image below, which you can click on for greater detail, shows that Federal International (2000) had debt of S$22.5m at the end of June 2021, a reduction from S$23.7m over a year. On the flip side, it has S$5.51m in cash leading to net debt of about S$16.9m.

How Healthy Is Federal International (2000)'s Balance Sheet?

The latest balance sheet data shows that Federal International (2000) had liabilities of S$30.8m due within a year, and liabilities of S$11.1m falling due after that. On the other hand, it had cash of S$5.51m and S$29.7m worth of receivables due within a year. So it has liabilities totalling S$6.75m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Federal International (2000) has a market capitalization of S$16.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Federal International (2000)'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.

Over 12 months, Federal International (2000) made a loss at the EBIT level, and saw its revenue drop to S$67m, which is a fall of 5.1%. That's not what we would hope to see.

Caveat Emptor

Importantly, Federal International (2000) had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost S$1.2m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of S$4.2m. In the meantime, we consider the stock very risky. 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 Federal International (2000) has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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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