Is Hong Leong Industries Berhad (KLSE:HLIND) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Hong Leong Industries Berhad (KLSE:HLIND) does use debt in its business. But is this debt a concern to shareholders?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hong Leong Industries Berhad

How Much Debt Does Hong Leong Industries Berhad Carry?

The image below, which you can click on for greater detail, shows that Hong Leong Industries Berhad had debt of RM16.7m at the end of December 2020, a reduction from RM31.6m over a year. However, it does have RM1.48b in cash offsetting this, leading to net cash of RM1.47b.

A Look At Hong Leong Industries Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Hong Leong Industries Berhad had liabilities of RM479.5m due within 12 months and liabilities of RM38.9m due beyond that. Offsetting these obligations, it had cash of RM1.48b as well as receivables valued at RM282.7m due within 12 months. So it can boast RM1.25b 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Hong Leong Industries Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Hong Leong Industries Berhad's saving grace is its low debt levels, because its EBIT has tanked 30% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hong Leong 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 company can only pay off debt with cold hard cash, not accounting profits. Hong Leong Industries 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. Over the last three years, Hong Leong Industries 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 Hong Leong Industries Berhad has net cash of RM1.47b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM413m, being 136% of its EBIT. So is Hong Leong Industries Berhad's debt a risk? It doesn't seem so to us. 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 instance, we've identified 2 warning signs for Hong Leong Industries Berhad that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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