Would Grand Hoover Berhad (KLSE:HOOVER) Be Better Off With Less 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Grand Hoover Berhad (KLSE:HOOVER) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Grand Hoover Berhad

What Is Grand Hoover Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Grand Hoover Berhad had RM15.5m of debt, an increase on RM12.2m, over one year. However, it does have RM2.23m in cash offsetting this, leading to net debt of about RM13.3m.

How Healthy Is Grand Hoover Berhad's Balance Sheet?

According to the last reported balance sheet, Grand Hoover Berhad had liabilities of RM28.9m due within 12 months, and liabilities of RM7.95m due beyond 12 months. Offsetting this, it had RM2.23m in cash and RM30.8m in receivables that were due within 12 months. So it has liabilities totalling RM3.84m more than its cash and near-term receivables, combined.

Given Grand Hoover Berhad has a market capitalization of RM29.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Grand Hoover Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Grand Hoover Berhad made a loss at the EBIT level, and saw its revenue drop to RM50m, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

While Grand Hoover 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. To be specific the EBIT loss came in at RM1.7m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM2.7m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Grand Hoover Berhad that 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. 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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