Here's Why Hiap Huat Holdings Berhad (KLSE:HHHCORP) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Hiap Huat Holdings Berhad (KLSE:HHHCORP) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. 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 Hiap Huat Holdings Berhad

What Is Hiap Huat Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hiap Huat Holdings Berhad had RM13.6m of debt in September 2020, down from RM14.5m, one year before. However, because it has a cash reserve of RM12.7m, its net debt is less, at about RM883.0k.

A Look At Hiap Huat Holdings Berhad's Liabilities

The latest balance sheet data shows that Hiap Huat Holdings Berhad had liabilities of RM3.81m due within a year, and liabilities of RM18.8m falling due after that. Offsetting this, it had RM12.7m in cash and RM4.85m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM5.06m.

Given Hiap Huat Holdings Berhad has a market capitalization of RM36.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hiap Huat Holdings Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Hiap Huat Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM41m, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hiap Huat Holdings Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM1.1m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM2.2m into a profit. So to be blunt we do think it is risky. 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. For instance, we've identified 1 warning sign for Hiap Huat Holdings 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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