Axiata Group Berhad (KLSE: AXIATA) has a somewhat strained balance sheet
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Axiata Berhad Group (KLSE: AXIATA) is in debt. But the more important question is: what risk does this debt create?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. 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, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest 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 Axiata Group Berhad
How much debt does Axiata Group Berhad have?
The image below, which you can click on for more details, shows that in March 2022, Axiata Group Berhad had debt of RM18.9 billion, up from RM17.8 billion in one year. However, he also had RM5.57 billion in cash, so his net debt is RM13.3 billion.
How healthy is Axiata Group Berhad’s balance sheet?
According to the latest published balance sheet, Axiata Group Berhad had liabilities of RM19.6 billion due within 12 months and liabilities of RM26.7 billion due beyond 12 months. On the other hand, it had liquid assets of RM5.57 billion and RM5.15 billion of receivables due within the year. It therefore has liabilities totaling RM35.6 billion more than its cash and short-term receivables, combined.
Given that this deficit is actually greater than the company’s market capitalization of RM28.6 billion, we think shareholders should really be watching Axiata Group Berhad’s debt levels, like a parent watching their child. riding a bike for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
While Axiata Group Berhad’s low debt to EBITDA ratio of 1.4 suggests modest use of debt, the fact that EBIT covered interest expense only 2.8 times last year makes us think. We therefore recommend that you closely monitor the impact of financing costs on the business. Above all, Axiata Group Berhad has increased its EBIT by 45% 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 ultimately, the company’s future profitability will decide whether Axiata Group Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay off its debts with paper profits; he needs cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Axiata Group Berhad has produced strong free cash flow equivalent to 57% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
Axiata Group Berhad’s level of total liabilities and interest coverage is definitely weighing on it, in our view. But the good news is that it looks like it could easily increase its EBIT. We think Axiata Group Berhad’s debt makes it a bit risky, after looking at the aforementioned data points together. Not all risk is bad, as it can boost stock returns if it pays off, but this leverage risk is worth keeping in mind. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Know that Axiata Group Berhad presents 2 warning signs in our investment analysis and 1 of them concerns…
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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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.
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