Does HPMT Holdings Berhad (KLSE:HPMT) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 HPMT Holdings Berhad (KLSE:HPMT) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for HPMT Holdings Berhad

How Much Debt Does HPMT Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that HPMT Holdings Berhad had RM27.0m of debt in June 2021, down from RM31.3m, one year before. However, its balance sheet shows it holds RM55.8m in cash, so it actually has RM28.8m net cash.

A Look At HPMT Holdings Berhad's Liabilities

We can see from the most recent balance sheet that HPMT Holdings Berhad had liabilities of RM19.3m falling due within a year, and liabilities of RM23.7m due beyond that. Offsetting these obligations, it had cash of RM55.8m as well as receivables valued at RM20.4m due within 12 months. So it can boast RM33.3m more liquid assets than total liabilities.

This short term liquidity is a sign that HPMT Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that HPMT Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, HPMT Holdings Berhad grew its EBIT by 62% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine HPMT Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. HPMT Holdings 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. Looking at the most recent three years, HPMT Holdings Berhad recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case HPMT Holdings Berhad has RM28.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 62% over the last year. So we don't think HPMT Holdings Berhad's use of debt is risky. 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 3 warning signs for HPMT Holdings Berhad that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

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