Here's Why SHH Resources Holdings Berhad (KLSE:SHH) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, SHH Resources Holdings Berhad (KLSE:SHH) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SHH Resources Holdings Berhad

What Is SHH Resources Holdings Berhad's Net Debt?

As you can see below, at the end of December 2020, SHH Resources Holdings Berhad had RM12.1m of debt, up from RM6.33m a year ago. Click the image for more detail. But on the other hand it also has RM14.7m in cash, leading to a RM2.60m net cash position.

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

We can see from the most recent balance sheet that SHH Resources Holdings Berhad had liabilities of RM27.0m falling due within a year, and liabilities of RM7.44m due beyond that. On the other hand, it had cash of RM14.7m and RM10.2m worth of receivables due within a year. So it has liabilities totalling RM9.47m more than its cash and near-term receivables, combined.

Given SHH Resources Holdings Berhad has a market capitalization of RM65.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, SHH Resources Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, SHH Resources Holdings Berhad turned things around in the last 12 months, delivering and EBIT of RM275k. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SHH Resources Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 year, SHH Resources Holdings Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

Although SHH Resources Holdings Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM2.60m. So we don't have any problem with SHH Resources Holdings Berhad's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with SHH Resources Holdings Berhad (including 1 which is significant) .

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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