Does Axiata Group Berhad (KLSE: AXIATA) have a healthy 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. We can see that Axiata Berhad Group (KLSE: AXIATA) uses debt in its business. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. 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. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Axiata Group Berhad
What is Axiata Group Berhad’s debt?
As you can see below, at the end of December 2021, Axiata Group Berhad had a debt of RM19.2 billion, compared to RM17.9 billion a year ago. Click on the image for more details. However, he has RM6.75 billion in cash to offset this, resulting in a net debt of around RM12.4 billion.
How strong is Axiata Group Berhad’s balance sheet?
According to the latest published balance sheet, Axiata Group Berhad had liabilities of RM20.4 billion due within 12 months and liabilities of RM27.1 billion due beyond 12 months. On the other hand, it had cash of RM6.75 billion and RM3.20 billion of receivables due within one year. Thus, its debts outweigh the sum of its cash and (short-term) receivables of RM37.5 billion.
Given that this deficit is actually greater than the company’s market capitalization of RM29.5 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.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
While Axiata Group Berhad’s low debt to EBITDA ratio of 1.3 suggests modest use of debt, the fact that EBIT covered interest expense only 2.8 times last year makes us think. But the interest payments are certainly enough to make us think about the affordability of its debt. It should be noted that Axiata Group Berhad’s EBIT jumped like bamboo after the rain, gaining 54% in the last twelve months. This will make it easier to manage your 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 are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Axiata Group Berhad has produced strong free cash flow equivalent to 54% 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. Looking at all the angles mentioned above, it seems to us that Axiata Group Berhad is a bit risky investment due to its debt. This isn’t necessarily a bad thing, since leverage can increase return on equity, but it is something to be aware of. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Know that Axiata Group Berhad presents 2 warning signs in our investment analysis and 1 of them is a little worrying…
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.