Is Ho Hup Construction Company Berhad (KLSE:HOHUP) Using Debt Sensibly?

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.' 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. As with many other companies Ho Hup Construction Company Berhad (KLSE:HOHUP) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ho Hup Construction Company Berhad

What Is Ho Hup Construction Company Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Ho Hup Construction Company Berhad had RM637.5m in debt in September 2022; about the same as the year before. However, it also had RM39.9m in cash, and so its net debt is RM597.7m.

How Strong Is Ho Hup Construction Company Berhad's Balance Sheet?

According to the last reported balance sheet, Ho Hup Construction Company Berhad had liabilities of RM586.7m due within 12 months, and liabilities of RM413.1m due beyond 12 months. Offsetting these obligations, it had cash of RM39.9m as well as receivables valued at RM414.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM545.4m.

This deficit casts a shadow over the RM128.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Ho Hup Construction Company Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Ho Hup Construction Company 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.

Over 12 months, Ho Hup Construction Company Berhad made a loss at the EBIT level, and saw its revenue drop to RM200m, which is a fall of 22%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Ho Hup Construction Company Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM1.7m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of RM49m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. For example Ho Hup Construction Company Berhad has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

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.