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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Boustead Heavy Industries Corporation Berhad (KLSE:BHIC) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Boustead Heavy Industries Corporation Berhad

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

The image below, which you can click on for greater detail, shows that Boustead Heavy Industries Corporation Berhad had debt of RM207.6m at the end of June 2023, a reduction from RM272.8m over a year. However, it does have RM8.00m in cash offsetting this, leading to net debt of about RM199.6m.

How Strong 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 RM360.5m falling due within a year, and liabilities of RM59.6m due beyond that. Offsetting this, it had RM8.00m in cash and RM97.4m in receivables that were due within 12 months. So it has liabilities totalling RM314.7m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM139.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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 RM114m, which is a fall of 24%. That makes us nervous, to say the least.

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. To be specific the EBIT loss came in at RM2.6m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through RM14m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Boustead Heavy Industries Corporation Berhad has 3 warning signs (and 2 which are potentially serious) we think you should know about.

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.

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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.