These 4 Measures Indicate That Hextar Industries Berhad (KLSE:HEXIND) Is Using Debt Reasonably Well

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.' 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 Hextar Industries Berhad (KLSE:HEXIND) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hextar Industries Berhad

What Is Hextar Industries Berhad's Debt?

As you can see below, Hextar Industries Berhad had RM58.9m of debt, at November 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds RM127.5m in cash, so it actually has RM68.6m net cash.

A Look At Hextar Industries Berhad's Liabilities

According to the last reported balance sheet, Hextar Industries Berhad had liabilities of RM39.0m due within 12 months, and liabilities of RM48.0m due beyond 12 months. Offsetting these obligations, it had cash of RM127.5m as well as receivables valued at RM63.5m due within 12 months. So it actually has RM103.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that Hextar Industries Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Hextar Industries Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Hextar Industries Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM4.0m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Hextar Industries Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hextar Industries 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. During the last year, Hextar Industries Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Hextar Industries Berhad has net cash of RM68.6m, as well as more liquid assets than liabilities. So we don't have any problem with Hextar Industries Berhad's use of debt. 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 Hextar Industries Berhad is showing 4 warning signs in our investment analysis , and 2 of those are significant...

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.

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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.