Is Boustead Heavy Industries Corporation Berhad (KLSE:BHIC) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Boustead Heavy Industries Corporation Berhad (KLSE:BHIC) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company 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.

See our latest analysis for Boustead Heavy Industries Corporation Berhad

What Is Boustead Heavy Industries Corporation Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Boustead Heavy Industries Corporation Berhad had RM221.1m of debt in March 2023, down from RM280.2m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Boustead Heavy Industries Corporation Berhad's Balance Sheet?

We can see from the most recent balance sheet that Boustead Heavy Industries Corporation Berhad had liabilities of RM344.2m falling due within a year, and liabilities of RM64.8m due beyond that. On the other hand, it had cash of RM782.0k and RM84.8m worth of receivables due within a year. So it has liabilities totalling RM323.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM83.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Boustead Heavy Industries Corporation Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Boustead Heavy Industries Corporation Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Boustead Heavy Industries Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM111m, which is a fall of 34%. To be frank that doesn't bode well.

Caveat Emptor

While Boustead Heavy Industries Corporation Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM15m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized RM33m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Boustead Heavy Industries Corporation Berhad (2 are a bit concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.