Is ABR Holdings (SGX:533) Weighed On By Its Debt Load?

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. Importantly, ABR Holdings Limited (SGX:533) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ABR Holdings

What Is ABR Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that ABR Holdings had S$5.08m in debt in December 2021; about the same as the year before. But it also has S$42.1m in cash to offset that, meaning it has S$37.0m net cash.

How Healthy Is ABR Holdings' Balance Sheet?

According to the last reported balance sheet, ABR Holdings had liabilities of S$31.5m due within 12 months, and liabilities of S$19.5m due beyond 12 months. On the other hand, it had cash of S$42.1m and S$7.62m worth of receivables due within a year. So its liabilities total S$1.27m more than the combination of its cash and short-term receivables.

Having regard to ABR Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the S$98.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, ABR Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 ABR Holdings will need earnings to service that debt. 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$75m, which is a fall of 13%. We would much prefer see growth.

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$2.5m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest 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. Be aware that ABR Holdings is showing 4 warning signs in our investment analysis , and 1 of those is significant...

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.