Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies SHH Resources Holdings Berhad (KLSE:SHH) makes use of debt. But is this debt a concern to shareholders?
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. 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. 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 SHH Resources Holdings Berhad
How Much Debt Does SHH Resources Holdings Berhad Carry?
As you can see below, SHH Resources Holdings Berhad had RM12.9m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds RM14.1m in cash, so it actually has RM1.23m net cash.
A Look At SHH Resources Holdings Berhad's Liabilities
Zooming in on the latest balance sheet data, we can see that SHH Resources Holdings Berhad had liabilities of RM22.2m due within 12 months and liabilities of RM6.82m due beyond that. Offsetting this, it had RM14.1m in cash and RM10.1m in receivables that were due within 12 months. So it has liabilities totalling RM4.74m more than its cash and near-term receivables, combined.
Of course, SHH Resources Holdings Berhad has a market capitalization of RM48.0m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, SHH Resources Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!
Shareholders should be aware that SHH Resources Holdings Berhad's EBIT was down 30% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 two years, SHH Resources Holdings Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that SHH Resources Holdings Berhad has RM1.23m in net cash. Despite the cash, we do find SHH Resources Holdings Berhad's EBIT growth rate concerning, so we're not particularly comfortable with the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with SHH Resources Holdings Berhad .
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. 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.
About KLSE:SHH
SHH Resources Holdings Berhad
An investment holding company, manufactures and trades wooden furniture in Malaysia and internationally.
Flawless balance sheet with proven track record.