Health Check: How Prudently Does ABR Holdings (SGX:533) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 ABR Holdings Limited (SGX:533) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ABR Holdings

What Is ABR Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 ABR Holdings had S$5.08m of debt, an increase on S$276.0k, over one year. However, its balance sheet shows it holds S$53.1m in cash, so it actually has S$48.0m net cash.

How Healthy Is ABR Holdings' Balance Sheet?

The latest balance sheet data shows that ABR Holdings had liabilities of S$31.8m due within a year, and liabilities of S$22.3m falling due after that. Offsetting this, it had S$53.1m in cash and S$8.79m in receivables that were due within 12 months. So it actually has S$7.71m more liquid assets than total liabilities.

This short term liquidity is a sign that ABR Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ABR Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is ABR Holdings's earnings that will influence how the balance sheet holds up in the future. 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 ABR Holdings had a loss before interest and tax, and actually shrunk its revenue by 29%, to S$86m. That makes us nervous, to say the least.

So How Risky Is ABR Holdings?

While ABR Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of S$6.0m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ABR Holdings (of which 1 is concerning!) you should know about.

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.

When trading ABR Holdings or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.