Is Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) A Risky Investment?

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.' 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 can see that Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Harrisons Holdings (Malaysia) Berhad

What Is Harrisons Holdings (Malaysia) Berhad's Net Debt?

As you can see below, Harrisons Holdings (Malaysia) Berhad had RM96.5m of debt at September 2020, down from RM183.4m a year prior. However, it does have RM176.4m in cash offsetting this, leading to net cash of RM79.9m.

A Look At Harrisons Holdings (Malaysia) Berhad's Liabilities

We can see from the most recent balance sheet that Harrisons Holdings (Malaysia) Berhad had liabilities of RM362.3m falling due within a year, and liabilities of RM63.0m due beyond that. On the other hand, it had cash of RM176.4m and RM300.6m worth of receivables due within a year. So it can boast RM51.7m more liquid assets than total liabilities.

This excess liquidity suggests that Harrisons Holdings (Malaysia) Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues 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!

Fortunately, Harrisons Holdings (Malaysia) Berhad grew its EBIT by 8.2% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Harrisons Holdings (Malaysia) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Harrisons Holdings (Malaysia) Berhad has net cash of RM79.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM154m, being 188% of its EBIT. So is Harrisons Holdings (Malaysia) Berhad's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Harrisons Holdings (Malaysia) Berhad you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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