Would Handal Energy Berhad (KLSE:HANDAL) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Handal Energy Berhad (KLSE:HANDAL) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Handal Energy Berhad

What Is Handal Energy Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Handal Energy Berhad had debt of RM16.7m at the end of September 2021, a reduction from RM29.7m over a year. However, it also had RM437.0k in cash, and so its net debt is RM16.2m.

How Healthy Is Handal Energy Berhad's Balance Sheet?

The latest balance sheet data shows that Handal Energy Berhad had liabilities of RM48.8m due within a year, and liabilities of RM1.50m falling due after that. On the other hand, it had cash of RM437.0k and RM33.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM16.0m.

While this might seem like a lot, it is not so bad since Handal Energy Berhad has a market capitalization of RM42.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Handal Energy Berhad had a loss before interest and tax, and actually shrunk its revenue by 21%, to RM66m. 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 RM693k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM2.5m. 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. Case in point: We've spotted 4 warning signs for Handal Energy Berhad you should be aware of, and 1 of them shouldn't be ignored.

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.