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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that SHH Resources Holdings Berhad (KLSE:SHH) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 SHH Resources Holdings Berhad

What Is SHH Resources Holdings Berhad's Debt?

As you can see below, SHH Resources Holdings Berhad had RM10.7m of debt at December 2022, down from RM12.6m a year prior. However, its balance sheet shows it holds RM26.3m in cash, so it actually has RM15.6m net cash.

How Strong Is SHH Resources Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SHH Resources Holdings Berhad had liabilities of RM17.8m due within 12 months and liabilities of RM6.15m due beyond that. On the other hand, it had cash of RM26.3m and RM9.99m worth of receivables due within a year. So it actually has RM12.4m more liquid assets than total liabilities.

This short term liquidity is a sign that SHH Resources Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SHH Resources Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, SHH Resources Holdings Berhad grew its EBIT by 477% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SHH Resources 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. SHH Resources 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, SHH Resources Holdings Berhad generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SHH Resources Holdings Berhad has net cash of RM15.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in RM15m. So we don't think SHH Resources Holdings Berhad's use of debt is risky. 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. For example, we've discovered 2 warning signs for SHH Resources Holdings Berhad that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.