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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Federal International (2000) Ltd (SGX:BDU) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Federal International (2000)

What Is Federal International (2000)'s Net Debt?

As you can see below, Federal International (2000) had S$4.23m of debt at June 2024, down from S$7.81m a year prior. However, it does have S$13.6m in cash offsetting this, leading to net cash of S$9.40m.

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$11.5m due within 12 months and liabilities of S$3.59m due beyond that. On the other hand, it had cash of S$13.6m and S$31.9m worth of receivables due within a year. So it actually has S$30.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Federal International (2000)'s balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Federal International (2000) boasts net cash, so it's fair to say it does not have a heavy debt load! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Federal International (2000) made a loss at the EBIT level, and saw its revenue drop to S$46m, which is a fall of 37%. That makes us nervous, to say the least.

So How Risky Is Federal International (2000)?

Although Federal International (2000) had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of S$1.8m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. There's no doubt the next few years will be crucial to how the business matures. 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 instance, we've identified 3 warning signs for Federal International (2000) (2 shouldn't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.