Does Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kumpulan H & L High-Tech Berhad

What Is Kumpulan H & L High-Tech Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kumpulan H & L High-Tech Berhad had RM9.27m of debt in October 2021, down from RM10.0m, one year before. But on the other hand it also has RM45.5m in cash, leading to a RM36.2m net cash position.

A Look At Kumpulan H & L High-Tech Berhad's Liabilities

According to the last reported balance sheet, Kumpulan H & L High-Tech Berhad had liabilities of RM3.25m due within 12 months, and liabilities of RM23.9m due beyond 12 months. On the other hand, it had cash of RM45.5m and RM4.80m worth of receivables due within a year. So it actually has RM23.1m more liquid assets than total liabilities.

This surplus suggests that Kumpulan H & L High-Tech Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kumpulan H & L High-Tech Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Kumpulan H & L High-Tech Berhad has boosted its EBIT by 96%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kumpulan H & L High-Tech 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Kumpulan H & L High-Tech 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 three years, Kumpulan H & L High-Tech Berhad produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Kumpulan H & L High-Tech Berhad has RM36.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 96% year-on-year EBIT growth. So we don't think Kumpulan H & L High-Tech Berhad's use of debt is risky. 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. To that end, you should be aware of the 3 warning signs we've spotted with Kumpulan H & L High-Tech Berhad .

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.