Would Handal Energy Berhad (KLSE:HANDAL) Be Better Off With Less 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 Handal Energy Berhad (KLSE:HANDAL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Handal Energy Berhad

What Is Handal Energy Berhad's Debt?

As you can see below, at the end of December 2020, Handal Energy Berhad had RM28.2m of debt, up from RM22.9m a year ago. Click the image for more detail. However, it also had RM1.05m in cash, and so its net debt is RM27.2m.

How Strong Is Handal Energy Berhad's Balance Sheet?

The latest balance sheet data shows that Handal Energy Berhad had liabilities of RM52.2m due within a year, and liabilities of RM3.94m falling due after that. Offsetting this, it had RM1.05m in cash and RM35.1m in receivables that were due within 12 months. So it has liabilities totalling RM20.0m more than its cash and near-term receivables, combined.

Handal Energy Berhad has a market capitalization of RM52.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. 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 9.5%, to RM77m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Handal Energy Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM20m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of RM26m. In the meantime, we consider the stock very risky. 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. Be aware that Handal Energy Berhad is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

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. 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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