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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Fraser and Neave, Limited (SGX:F99) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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. 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 Fraser and Neave
How Much Debt Does Fraser and Neave Carry?
As you can see below, Fraser and Neave had S$829.7m of debt at September 2019, down from S$871.4m a year prior. However, it does have S$420.3m in cash offsetting this, leading to net debt of about S$409.4m.
A Look At Fraser and Neave's Liabilities
The latest balance sheet data shows that Fraser and Neave had liabilities of S$501.6m due within a year, and liabilities of S$885.4m falling due after that. On the other hand, it had cash of S$420.3m and S$352.3m worth of receivables due within a year. So its liabilities total S$614.3m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Fraser and Neave is worth S$2.54b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).