Is Federal International (2000) (SGX:BDU) A Risky Investment?

Warren Buffett famously said, '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. We can see that Federal International (2000) Ltd (SGX:BDU) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

Check out our latest analysis for Federal International (2000)

How Much Debt Does Federal International (2000) Carry?

The chart below, which you can click on for greater detail, shows that Federal International (2000) had S$23.7m in debt in June 2020; about the same as the year before. However, it also had S$5.64m in cash, and so its net debt is S$18.1m.

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

Zooming in on the latest balance sheet data, we can see that Federal International (2000) had liabilities of S$30.5m due within 12 months and liabilities of S$14.7m due beyond that. Offsetting this, it had S$5.64m in cash and S$36.7m in receivables that were due within 12 months. So it has liabilities totalling S$2.80m more than its cash and near-term receivables, combined.

Given Federal International (2000) has a market capitalization of S$19.7m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Federal International (2000) will need earnings to service that debt. 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.

In the last year Federal International (2000) wasn't profitable at an EBIT level, but managed to grow its revenue by 59%, to S$70m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Federal International (2000) still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable S$3.9m 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of S$2.0m. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Federal International (2000) (1 can't be ignored!) 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. 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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