Is Hengyuan Refining Company Berhad (KLSE:HENGYUAN) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Hengyuan Refining Company Berhad (KLSE:HENGYUAN) makes use of debt. But should shareholders be worried about its use of debt?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Hengyuan Refining Company Berhad Carry?

The image below, which you can click on for greater detail, shows that Hengyuan Refining Company Berhad had debt of RM1.43b at the end of December 2024, a reduction from RM1.72b over a year. On the flip side, it has RM679.1m in cash leading to net debt of about RM754.6m.

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

We can see from the most recent balance sheet that Hengyuan Refining Company Berhad had liabilities of RM2.25b falling due within a year, and liabilities of RM373.9m due beyond that. On the other hand, it had cash of RM679.1m and RM478.9m worth of receivables due within a year. So it has liabilities totalling RM1.47b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM450.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. 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 it is Hengyuan Refining Company Berhad's earnings that will influence how the balance sheet holds up in the future. 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 .

See our latest analysis for Hengyuan Refining Company Berhad

Over 12 months, Hengyuan Refining Company Berhad reported revenue of RM17b, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Hengyuan Refining Company Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM227m. 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 lost RM358m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. Case in point: We've spotted 1 warning sign for Hengyuan Refining Company Berhad you should be aware of.

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.