Does Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) Have A Healthy 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Harrisons Holdings (Malaysia) Berhad

How Much Debt Does Harrisons Holdings (Malaysia) Berhad Carry?

The image below, which you can click on for greater detail, shows that Harrisons Holdings (Malaysia) Berhad had debt of RM131.0m at the end of December 2020, a reduction from RM151.8m over a year. But on the other hand it also has RM166.2m in cash, leading to a RM35.2m net cash position.

How Strong Is Harrisons Holdings (Malaysia) Berhad's Balance Sheet?

We can see from the most recent balance sheet that Harrisons Holdings (Malaysia) Berhad had liabilities of RM365.9m falling due within a year, and liabilities of RM50.9m due beyond that. Offsetting this, it had RM166.2m in cash and RM302.4m in receivables that were due within 12 months. So it can boast RM51.8m more liquid assets than total liabilities.

This excess liquidity suggests that Harrisons Holdings (Malaysia) Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Harrisons Holdings (Malaysia) Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Harrisons Holdings (Malaysia) Berhad grew its EBIT at 20% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Harrisons Holdings (Malaysia) Berhad 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. Harrisons Holdings (Malaysia) Berhad 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. Over the last three years, Harrisons Holdings (Malaysia) Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Harrisons Holdings (Malaysia) Berhad has RM35.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM102m, being 159% of its EBIT. So we don't think Harrisons Holdings (Malaysia) Berhad'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. Be aware that Harrisons Holdings (Malaysia) Berhad is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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