Is HPMT Holdings Berhad (KLSE:HPMT) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for HPMT Holdings Berhad

What Is HPMT Holdings Berhad's Net Debt?

As you can see below, HPMT Holdings Berhad had RM27.7m of debt at December 2020, down from RM38.2m a year prior. However, its balance sheet shows it holds RM53.3m in cash, so it actually has RM25.6m 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 RM18.0m falling due within a year, and liabilities of RM24.8m due beyond that. Offsetting this, it had RM53.3m in cash and RM15.2m in receivables that were due within 12 months. So it can boast RM25.6m more liquid assets than total liabilities.

This surplus suggests that HPMT Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, HPMT Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that HPMT Holdings Berhad has increased its EBIT by 6.5% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Considering the last three years, HPMT Holdings Berhad actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case HPMT Holdings Berhad has RM25.6m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 6.5% in the last twelve months. So we are not troubled with HPMT Holdings Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for HPMT Holdings Berhad 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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