SHH Resources Holdings Berhad (KLSE:SHH) Seems To Use Debt Quite Sensibly

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.' 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. We note that SHH Resources Holdings Berhad (KLSE:SHH) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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.

View 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 RM9.71m of debt at June 2023, down from RM12.3m a year prior. But it also has RM34.7m in cash to offset that, meaning it has RM25.0m net cash.

How Healthy 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 RM15.7m due within 12 months and liabilities of RM5.75m due beyond that. Offsetting this, it had RM34.7m in cash and RM4.19m in receivables that were due within 12 months. So it can boast RM17.4m 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.

It is just as well that SHH Resources Holdings Berhad's load is not too heavy, because its EBIT was down 32% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is SHH Resources Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SHH Resources Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, SHH Resources Holdings Berhad actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case SHH Resources Holdings Berhad has RM25.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 131% of that EBIT to free cash flow, bringing in RM14m. So we are not troubled with SHH Resources Holdings Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with SHH Resources Holdings Berhad , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.