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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Ho Hup Construction Company Berhad (KLSE:HOHUP) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ho Hup Construction Company Berhad

How Much Debt Does Ho Hup Construction Company Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Ho Hup Construction Company Berhad had RM482.8m of debt in September 2024, down from RM600.3m, one year before. On the flip side, it has RM19.8m in cash leading to net debt of about RM463.0m.

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

Zooming in on the latest balance sheet data, we can see that Ho Hup Construction Company Berhad had liabilities of RM652.6m due within 12 months and liabilities of RM137.0m due beyond that. On the other hand, it had cash of RM19.8m and RM273.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM496.3m.

This deficit casts a shadow over the RM62.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ho Hup Construction Company 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.

Over 12 months, Ho Hup Construction Company Berhad made a loss at the EBIT level, and saw its revenue drop to RM62m, which is a fall of 73%. To be frank that doesn't bode well.

Caveat Emptor

While Ho Hup Construction Company Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM17m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through RM25m in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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 4 warning signs for Ho Hup Construction Company Berhad (2 don't sit too well with us) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.