Heng Hup Holdings (HKG:1891) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Heng Hup Holdings Limited (HKG:1891) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Heng Hup Holdings

What Is Heng Hup Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Heng Hup Holdings had RM17.5m of debt, an increase on RM14.6m, over one year. But it also has RM37.9m in cash to offset that, meaning it has RM20.3m net cash.

How Healthy Is Heng Hup Holdings' Balance Sheet?

According to the last reported balance sheet, Heng Hup Holdings had liabilities of RM53.4m due within 12 months, and liabilities of RM7.78m due beyond 12 months. Offsetting this, it had RM37.9m in cash and RM122.6m in receivables that were due within 12 months. So it actually has RM99.2m more liquid assets than total liabilities.

This surplus strongly suggests that Heng Hup Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Heng Hup Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Heng Hup Holdings grew its EBIT by 614% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Heng Hup Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Heng Hup Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Heng Hup Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Heng Hup Holdings has net cash of RM20.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 614% year-on-year EBIT growth. So we don't think Heng Hup Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Heng Hup Holdings (1 shouldn't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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