Would Federal International (2000) (SGX:BDU) Be Better Off With Less 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. 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 A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Federal International (2000)

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

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Federal International (2000) had S$34.0m of debt, an increase on S$24.1m, over one year. However, it does have S$6.88m in cash offsetting this, leading to net debt of about S$27.1m.

A Look At Federal International (2000)'s Liabilities

The latest balance sheet data shows that Federal International (2000) had liabilities of S$43.6m due within a year, and liabilities of S$12.8m falling due after that. On the other hand, it had cash of S$6.88m and S$38.0m worth of receivables due within a year. So it has liabilities totalling S$11.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Federal International (2000) is worth S$20.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Federal International (2000)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Federal International (2000) wasn't profitable at an EBIT level, but managed to grow its revenue by 8.8%, to S$68m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Federal International (2000) produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping S$2.8m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled S$8.9m in negative free cash flow over the last twelve months. So suffice it to say 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, we've discovered 3 warning signs for Federal International (2000) (2 can't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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