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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, HPMT Holdings Berhad (KLSE:HPMT) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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 RM22.5m of debt in March 2022, down from RM26.7m, one year before. But on the other hand it also has RM53.8m in cash, leading to a RM31.3m net cash position.

How Strong Is HPMT Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that HPMT Holdings Berhad had liabilities of RM26.8m due within a year, and liabilities of RM20.8m falling due after that. On the other hand, it had cash of RM53.8m and RM28.9m worth of receivables due within a year. So it actually has RM35.0m more liquid assets than total liabilities.

This excess liquidity suggests that HPMT Holdings Berhad is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, HPMT Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that HPMT Holdings Berhad has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if HPMT Holdings Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. During the last three years, HPMT Holdings Berhad generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HPMT Holdings Berhad has net cash of RM31.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM14m, being 85% of its EBIT. The bottom line is that we do not find HPMT Holdings Berhad's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with HPMT Holdings Berhad .

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.