Is SHH Resources Holdings Berhad (KLSE:SHH) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that SHH Resources Holdings Berhad (KLSE:SHH) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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, at the end of September 2020, SHH Resources Holdings Berhad had RM13.1m of debt, up from RM9.20m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM16.0m in cash, so it actually has RM2.91m net cash.

A Look At SHH Resources Holdings Berhad's Liabilities

According to the last reported balance sheet, SHH Resources Holdings Berhad had liabilities of RM28.9m due within 12 months, and liabilities of RM7.46m due beyond 12 months. Offsetting this, it had RM16.0m in cash and RM11.0m in receivables that were due within 12 months. So it has liabilities totalling RM9.34m more than its cash and near-term receivables, combined.

Since publicly traded SHH Resources Holdings Berhad shares are worth a total of RM52.0m, it seems unlikely that this level of liabilities would be a major threat. 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! 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.

Over 12 months, SHH Resources Holdings Berhad reported revenue of RM104m, which is a gain of 5.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is SHH Resources Holdings Berhad?

While SHH Resources Holdings Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM282k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 3 warning signs for SHH Resources Holdings Berhad you should be aware of, and 1 of them shouldn't be ignored.

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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