Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

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

How Much Debt Does Kumpulan H & L High-Tech Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Kumpulan H & L High-Tech Berhad had RM10.3m of debt in January 2021, down from RM10.8m, one year before. But it also has RM29.5m in cash to offset that, meaning it has RM19.3m net cash.

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 RM3.74m due within 12 months, and liabilities of RM24.9m due beyond 12 months. Offsetting this, it had RM29.5m in cash and RM3.88m in receivables that were due within 12 months. So it actually has RM4.76m 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. Simply put, the fact that Kumpulan H & L High-Tech Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Kumpulan H & L High-Tech Berhad's EBIT fell a jaw-dropping 31% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kumpulan H & L High-Tech 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Kumpulan H & L High-Tech 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. During the last three years, Kumpulan H & L High-Tech Berhad produced sturdy free cash flow equating to 69% 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 RM19.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM2.7m, being 69% of its EBIT. So we are not troubled with Kumpulan H & L High-Tech Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Kumpulan H & L High-Tech Berhad (1 shouldn't be ignored) you should be aware of.

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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