We Think HPMT Holdings Berhad (KLSE:HPMT) Can Stay On Top Of Its Debt

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.' 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. Importantly, HPMT Holdings Berhad (KLSE:HPMT) does carry debt. But the real question is whether this debt is making the company risky.

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for HPMT Holdings Berhad

What Is HPMT Holdings Berhad's Net Debt?

As you can see below, HPMT Holdings Berhad had RM29.5m of debt at September 2020, down from RM38.2m a year prior. However, it does have RM51.1m in cash offsetting this, leading to net cash of RM21.6m.

How Healthy Is HPMT Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that HPMT Holdings Berhad had liabilities of RM17.6m falling due within a year, and liabilities of RM26.2m due beyond that. Offsetting these obligations, it had cash of RM51.1m as well as receivables valued at RM16.3m due within 12 months. So it can boast RM23.5m 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. Succinctly put, HPMT Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that HPMT Holdings Berhad has seen its EBIT plunge 18% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While HPMT Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, HPMT Holdings Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that HPMT Holdings Berhad has net cash of RM21.6m, as well as more liquid assets than liabilities. So we don't have any problem with HPMT Holdings Berhad's use of debt. 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. Take risks, for example - HPMT Holdings Berhad has 3 warning signs we think 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.

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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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