BBR Holdings (S) (SGX:KJ5) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that BBR Holdings (S) Ltd (SGX:KJ5) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 BBR Holdings (S)

What Is BBR Holdings (S)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 BBR Holdings (S) had S$153.9m of debt, an increase on S$114.6m, over one year. On the flip side, it has S$57.5m in cash leading to net debt of about S$96.4m.

How Healthy Is BBR Holdings (S)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BBR Holdings (S) had liabilities of S$89.8m due within 12 months and liabilities of S$157.4m due beyond that. On the other hand, it had cash of S$57.5m and S$123.8m worth of receivables due within a year. So its liabilities total S$65.9m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of S$47.1m, we think shareholders really should watch BBR Holdings (S)'s debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since BBR Holdings (S) 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 BBR Holdings (S) had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to S$122m. We would much prefer see growth.

Caveat Emptor

Importantly, BBR Holdings (S) had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable S$28m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through S$36m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Be aware that BBR Holdings (S) is showing 3 warning signs in our investment analysis , and 2 of those are significant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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