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

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.' 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?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hiap Huat Holdings Berhad

What Is Hiap Huat Holdings Berhad's Net Debt?

As you can see below, Hiap Huat Holdings Berhad had RM13.4m of debt at December 2020, down from RM14.3m a year prior. However, because it has a cash reserve of RM12.0m, its net debt is less, at about RM1.41m.

How Strong Is Hiap Huat Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Hiap Huat Holdings Berhad had liabilities of RM4.83m due within 12 months, and liabilities of RM18.4m due beyond 12 months. On the other hand, it had cash of RM12.0m and RM6.61m worth of receivables due within a year. So its liabilities total RM4.64m more than the combination of its cash and short-term receivables.

Since publicly traded Hiap Huat Holdings Berhad shares are worth a total of RM44.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hiap Huat Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 27%, to RM37m. To be frank that doesn't bode well.

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 RM1.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of RM1.3m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Hiap Huat Holdings Berhad you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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