Is ABR Holdings (SGX:533) Using Debt In A Risky Way?

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.' 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. As with many other companies ABR Holdings Limited (SGX:533) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ABR Holdings

What Is ABR Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 ABR Holdings had debt of S$5.08m, up from S$276.0k in one year. But on the other hand it also has S$53.1m in cash, leading to a S$48.0m net cash position.

How Healthy Is ABR Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ABR Holdings had liabilities of S$31.8m due within 12 months and liabilities of S$22.3m due beyond that. On the other hand, it had cash of S$53.1m and S$4.11m worth of receivables due within a year. So it can boast S$3.03m 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. Simply put, the fact that ABR Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, ABR Holdings made a loss at the EBIT level, and saw its revenue drop to S$86m, which is a fall of 29%. 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 taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with ABR Holdings (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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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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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