Is Handal Energy Berhad (KLSE:HANDAL) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Handal Energy Berhad (KLSE:HANDAL) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Handal Energy Berhad

How Much Debt Does Handal Energy Berhad Carry?

As you can see below, at the end of June 2020, Handal Energy Berhad had RM29.9m of debt, up from RM12.4m a year ago. Click the image for more detail. On the flip side, it has RM2.51m in cash leading to net debt of about RM27.4m.

A Look At Handal Energy Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Handal Energy Berhad had liabilities of RM54.8m due within 12 months and liabilities of RM3.72m due beyond that. Offsetting these obligations, it had cash of RM2.51m as well as receivables valued at RM31.3m due within 12 months. So it has liabilities totalling RM24.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Handal Energy Berhad is worth RM44.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Handal Energy 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.

Over 12 months, Handal Energy Berhad reported revenue of RM99m, which is a gain of 86%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Handal Energy Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM20m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM15m of cash over the last year. So suffice it to say we consider the stock very 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. For instance, we've identified 3 warning signs for Handal Energy Berhad (2 are a bit concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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