Is SHH Resources Holdings Berhad (KLSE:SHH) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, SHH Resources Holdings Berhad (KLSE:SHH) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SHH Resources Holdings Berhad

What Is SHH Resources Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that SHH Resources Holdings Berhad had RM10.2m of debt in March 2023, down from RM12.9m, one year before. But on the other hand it also has RM28.4m in cash, leading to a RM18.3m net cash position.

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 RM16.8m due within 12 months and liabilities of RM5.86m due beyond that. On the other hand, it had cash of RM28.4m and RM9.11m worth of receivables due within a year. So it can boast RM14.9m more liquid assets than total liabilities.

This surplus suggests that SHH Resources Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that SHH Resources Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that SHH Resources Holdings Berhad grew its EBIT by 248% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. 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, 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. Over the most recent three years, SHH Resources Holdings Berhad recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 RM18.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 248% year-on-year EBIT growth. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for SHH Resources Holdings Berhad you should know about.

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.