We Think SHH Resources Holdings Berhad (KLSE:SHH) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that SHH Resources Holdings Berhad (KLSE:SHH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for SHH Resources Holdings Berhad

How Much Debt Does SHH Resources Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that SHH Resources Holdings Berhad had debt of RM9.01m at the end of March 2024, a reduction from RM10.2m over a year. But on the other hand it also has RM32.2m in cash, leading to a RM23.2m 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 RM16.0m due within 12 months and liabilities of RM4.83m due beyond that. Offsetting this, it had RM32.2m in cash and RM10.1m in receivables that were due within 12 months. So it actually has RM21.5m more liquid assets than total liabilities.

It's good to see that SHH Resources Holdings Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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 22% 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 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 last three years, SHH Resources Holdings Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case SHH Resources Holdings Berhad has RM23.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM4.7m, being 184% of its EBIT. 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. We've identified 1 warning sign with SHH Resources Holdings Berhad , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com