Hengyuan Refining Company Berhad (KLSE:HENGYUAN) Has Debt But No Earnings; Should You Worry?

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. We can see that Hengyuan Refining Company Berhad (KLSE:HENGYUAN) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Hengyuan Refining Company Berhad

What Is Hengyuan Refining Company Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Hengyuan Refining Company Berhad had RM1.71b of debt, an increase on RM983.0m, over one year. On the flip side, it has RM439.3m in cash leading to net debt of about RM1.27b.

How Healthy Is Hengyuan Refining Company Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hengyuan Refining Company Berhad had liabilities of RM3.92b due within 12 months and liabilities of RM504.7m due beyond that. Offsetting this, it had RM439.3m in cash and RM1.38b in receivables that were due within 12 months. So it has liabilities totalling RM2.61b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM870.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Hengyuan Refining Company Berhad would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hengyuan Refining Company 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, Hengyuan Refining Company Berhad saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Hengyuan Refining Company Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM314m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized RM413m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Hengyuan Refining Company Berhad (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.