IJM Corporation Berhad (KLSE:IJM) has a fairly healthy balance sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that IJM Corporation Berhad (KLSE: IJM) has debt on its balance sheet. But the more important question is: what risk does this debt create?

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest analysis for IJM Corporation Berhad

What is IJM Corporation Berhad’s net debt?

You can click on the chart below for historical figures, but it shows that IJM Corporation Berhad had RM5.79 billion in debt in September 2021, up from RM7.19 billion a year earlier. However, he has RM4.00 billion in cash to offset this, resulting in a net debt of around RM1.79 billion.

KLSE: IJM Debt to Equity History February 22, 2022

A look at the liabilities of IJM Corporation Berhad

Zooming in on the latest balance sheet data, we can see that IJM Corporation Berhad had liabilities of RM4.76b due within 12 months and liabilities of RM5.15b due beyond. On the other hand, it had cash of RM4.00 billion and RM1.79 billion of receivables due within the year. It therefore has liabilities totaling RM4.12 billion more than its cash and short-term receivables, combined.

This shortfall is sizable compared to its market capitalization of RM5.35b, so he suggests shareholders keep an eye on IJM Corporation Berhad’s use of debt. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

IJM Corporation Berhad has a low net debt to EBITDA ratio of just 1.4. And its EBIT easily covers its interest charges, which is 14.3 times the size. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, IJM Corporation Berhad has grown its EBIT by 74% over the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine IJM Corporation Berhad’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, IJM Corporation Berhad has recorded free cash flow of 80% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

IJM Corporation Berhad’s interest cover suggests they can manage their debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But truth be told, we think his total passive level undermines that impression a bit. When we consider the range of factors above, it seems that IJM Corporation Berhad is quite sensible with its use of debt. This means they take on a bit more risk, hoping to increase shareholder returns. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that IJM Corporation Berhad displays 2 warning signs in our investment analysis and 1 of them makes us a little uncomfortable…

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Comments are closed.