Is BBR Holdings (S) (SGX:KJ5) A Risky Investment?

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, BBR Holdings (S) Ltd (SGX:KJ5) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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.

Check out our latest analysis for BBR Holdings (S)

What Is BBR Holdings (S)'s Debt?

The image below, which you can click on for greater detail, shows that BBR Holdings (S) had debt of S$144.8m at the end of June 2021, a reduction from S$155.4m over a year. On the flip side, it has S$65.1m in cash leading to net debt of about S$79.7m.

A Look At BBR Holdings (S)'s Liabilities

According to the last reported balance sheet, BBR Holdings (S) had liabilities of S$82.7m due within 12 months, and liabilities of S$149.4m due beyond 12 months. Offsetting these obligations, it had cash of S$65.1m as well as receivables valued at S$94.7m due within 12 months. So it has liabilities totalling S$72.3m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's S$51.3m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. 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) wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to S$157m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, BBR Holdings (S) still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping S$21m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of S$18m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example BBR Holdings (S) has 2 warning signs (and 1 which is significant) we think you should know about.

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.
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