Is Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) 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.' 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 Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Harrisons Holdings (Malaysia) Berhad

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

The image below, which you can click on for greater detail, shows that Harrisons Holdings (Malaysia) Berhad had debt of RM108.3m at the end of June 2021, a reduction from RM180.6m over a year. But on the other hand it also has RM193.7m in cash, leading to a RM85.3m net cash position.

How Healthy 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 RM340.1m falling due within a year, and liabilities of RM59.1m due beyond that. Offsetting this, it had RM193.7m in cash and RM286.3m in receivables that were due within 12 months. So it can boast RM80.7m 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. Simply put, the fact that Harrisons Holdings (Malaysia) Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Harrisons Holdings (Malaysia) Berhad grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Harrisons Holdings (Malaysia) Berhad's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Harrisons Holdings (Malaysia) Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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 we empathize with investors who find debt concerning, you should keep in mind that Harrisons Holdings (Malaysia) Berhad has net cash of RM85.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 161% of that EBIT to free cash flow, bringing in RM95m. The bottom line is that we do not find Harrisons Holdings (Malaysia) Berhad's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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