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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Handal Energy Berhad (KLSE:HANDAL) does carry debt. But the real question is whether this debt is making the company risky.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Handal Energy Berhad

How Much Debt Does Handal Energy Berhad Carry?

The chart below, which you can click on for greater detail, shows that Handal Energy Berhad had RM16.9m in debt in June 2022; about the same as the year before. On the flip side, it has RM1.16m in cash leading to net debt of about RM15.7m.

How Healthy Is Handal Energy Berhad's Balance Sheet?

We can see from the most recent balance sheet that Handal Energy Berhad had liabilities of RM54.5m falling due within a year, and liabilities of RM434.0k due beyond that. Offsetting these obligations, it had cash of RM1.16m as well as receivables valued at RM16.2m due within 12 months. So it has liabilities totalling RM37.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of RM33.7m, we think shareholders really should watch Handal Energy Berhad's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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.

In the last year Handal Energy Berhad had a loss before interest and tax, and actually shrunk its revenue by 59%, to RM30m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Handal Energy Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM23m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of RM29m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. For instance, we've identified 4 warning signs for Handal Energy Berhad (3 don't sit too well with us) 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. 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.