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Here’s Why Bina Darulaman Berhad (KLSE:BDB) Is Significantly Indebted




Legendary fund manager Li Lu (who backed Charlie Munger) once said, “The biggest investment risk is not price volatility, but whether you will suffer a permanent loss of capital.” It seems the smart money knows that debt – which usually comes with bankruptcies – is a very important factor when you assess how risky a company is. As with many other companies Bina Darulaman Berhad (KLSE:BDB) takes advantage of debt. But is this debt a concern for shareholders?


What risk does debt entail?

Debt and other obligations become risky for a company when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. When things go really bad, the lenders can take control of the company. However, a more common (but still painful) scenario is that it needs to raise new equity at a low price, permanently diluting shareholders. Debt can, of course, be an important tool in companies, especially in wealthy companies. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.

Check out our latest analysis for Bina Darulaman Berhad

How much debt does Bina Darulaman Berhad bear?

As you can see below, Bina Darulaman Berhad had a debt of RM110.7 million in March 2021, compared to RM 127.6 million a year earlier. However, it also had RM82.4 million in cash, so the net debt is RM28.3 million.

KLSE: History of BDB Debt to Equity 16 July 2021


How strong is Bina Darulaman Berhad’s balance sheet?

From the most recent balance sheet, we can see that Bina Darulaman Berhad had debts of RM206.9 million that fell due within one year, and liabilities of RM34.6 million thereafter. To offset these obligations, it had RM 82.4 million in cash as well as RM 79.2 million receivables to be paid within 12 months. So his liabilities total RM79.9 million more than the combination of his cash and receivables.

This shortfall is not so bad as Bina Darulaman Berhad is worth 144.3 million RM, and so could probably raise enough capital to bolster its balance sheet should the need arise. However, it’s still worth looking closely at debt repayment ability.

To upgrade a company’s debt relative to revenue, we calculate net debt divided by revenue before interest, taxes, depreciation, and amortization (EBITDA) and revenue before interest and tax (EBIT) divided by interest expense (are interest cover). In this way, we take into account both the absolute amount of the debt and the interest rates paid on it.

While Bina Darulaman Berhad has a fairly reasonable net debt to EBITDA, a multiple of 1.5, interest coverage at 1.8 appears weak. This makes us wonder if the company pays high interest because it is considered risky. Either way, it’s safe to say the company has significant debt. Importantly, Bina Darulaman Berhad’s EBIT fell by as much as 48% over the past twelve months. If that decline continues, paying off debt will be more difficult than selling foie gras at a vegan convention. There is no doubt that we learn the most about debt from the balance sheet. But you can’t see debt completely isolated; as Bina Darulaman Berhad needs income to repay that debt. So if you want to know more about the earnings, it might be worth checking out this graph of the long-term profit trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don’t do it. So the logical step is to look at the portion of that EBIT that is matched by actual free cash flow. Fortunately for all shareholders, Bina Darulaman Berhad has produced more free cash flow than EBIT in the past two years. That kind of strong cash conversion gets us just as excited as the audience when the beat sinks in at a Daft Punk concert.

Our view

Bina Darulaman Berhad’s EBIT growth rate and interest coverage certainly weighs heavily on us. But the good news is that it seems to convert EBIT into free cash flow with ease. Considering all the factors discussed, it seems to us that Bina Darulaman Berhad is taking some risks with the use of debt. While that debt could boost returns, we think the company has enough leverage now. The balance sheet is clearly the area to focus on when analyzing debt. Ultimately, however, any business can contain risks that exist off-balance sheet. For example, we discovered 4 warning signs for Bina Darulaman Berhad (1 is potentially serious!) that you should be aware of before investing here.


At the end of the day, it’s often better to focus on companies that are free of net debt. You can access our special list of such companies (all with a track record of earnings growth). It is free.

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This article from Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. We strive to provide you with long-term focused analysis powered by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no position in said stocks.
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