Here’s why Genting Berhad (KLSE: GENTING) is weighed down by debt
Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Mostly, Genting Berhad (KLSE: GENTING) bears the debt. But does this debt concern shareholders?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. 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 look at debt levels, we first look at cash and debt levels together.
What is the debt of Genting Berhad?
You can click on the graph below for historical figures, but it shows that as of December 2020, Genting Berhad had a debt of RM35.8 billion, an increase from RM32.1 billion, on a year. On the other hand, he has RM27.6 billion in cash, resulting in net debt of around RM8.24 billion.
Is Genting Berhad’s track record healthy?
Zooming in on the latest balance sheet data, we can see that Genting Berhad had a liability of RM 7.07 billion due within 12 months and a liability of RM 38.0 billion due beyond. On the other hand, he had a cash position of RM 27.6 billion and RM 1.95 billion of receivables due within one year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by RM15.6 billion.
This is a mountain of leverage compared to its market cap of RM17.9 billion. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
While we are not worried about Genting Berhad’s net debt to EBITDA ratio of 3.4, we do believe that its very low 0.53 times interest coverage is a sign of high leverage. It appears the company incurs significant depreciation and amortization costs, so perhaps its debt load is heavier than it first appears, since EBITDA is arguably a generous measure of profits. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. Worse yet, Genting Berhad has seen its EBIT reach 94% over the past 12 months. If the income continues like this for the long term, there is an incredible chance to pay off that debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Genting Berhad can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Genting Berhad has recorded substantial total negative free cash flow. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.
Our point of view
To be frank, Genting Berhad’s conversion of EBIT to free cash flow and his track record of (not) growing his EBIT makes us rather uncomfortable with his debt levels. And even his total passive level doesn’t inspire much confidence. Considering all of the aforementioned factors, it seems Genting Berhad has too much debt. This kind of risk is acceptable to some, but it certainly does not float our boat. 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 off the balance sheet. For example, Genting Berhad has 2 warning signs (and 1 which makes us a little uncomfortable) we think you should know.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
If you are looking for stocks to buy, use the cheapest platform * which is ranked # 1 overall by Barron’s, Interactive brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.