Hong Leong Industries Berhad (KLSE:HLIND) Seems To Use Debt Rather Sparingly

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.' 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, Hong Leong Industries Berhad (KLSE:HLIND) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hong Leong Industries Berhad

What Is Hong Leong Industries Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hong Leong Industries Berhad had RM10.8m of debt, an increase on none, over one year. However, its balance sheet shows it holds RM1.91b in cash, so it actually has RM1.90b net cash.

How Strong Is Hong Leong Industries Berhad's Balance Sheet?

We can see from the most recent balance sheet that Hong Leong Industries Berhad had liabilities of RM510.7m falling due within a year, and liabilities of RM34.0m due beyond that. On the other hand, it had cash of RM1.91b and RM306.5m worth of receivables due within a year. So it can boast RM1.67b more liquid assets than total liabilities.

This surplus liquidity suggests that Hong Leong Industries Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Hong Leong Industries 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 Hong Leong Industries Berhad has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hong Leong Industries Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hong Leong 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. Happily for any shareholders, Hong Leong Industries Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hong Leong Industries Berhad has RM1.90b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM621m, being 102% of its EBIT. The bottom line is that Hong Leong Industries Berhad's use of debt is absolutely fine. 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. For example, we've discovered 2 warning signs for Hong Leong Industries Berhad (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.