Heng Huat Resources Group Berhad (KLSE:HHGROUP) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Heng Huat Resources Group Berhad (KLSE:HHGROUP) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Heng Huat Resources Group Berhad

How Much Debt Does Heng Huat Resources Group Berhad Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Heng Huat Resources Group Berhad had debt of RM24.5m, up from RM18.8m in one year. But it also has RM34.3m in cash to offset that, meaning it has RM9.73m net cash.

A Look At Heng Huat Resources Group Berhad's Liabilities

The latest balance sheet data shows that Heng Huat Resources Group Berhad had liabilities of RM43.7m due within a year, and liabilities of RM23.4m falling due after that. On the other hand, it had cash of RM34.3m and RM24.4m worth of receivables due within a year. So its liabilities total RM8.34m more than the combination of its cash and short-term receivables.

Of course, Heng Huat Resources Group Berhad has a market capitalization of RM271.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Heng Huat Resources Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Heng Huat Resources Group Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM14m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Heng Huat Resources Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Heng Huat Resources Group Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Heng Huat Resources Group Berhad actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Heng Huat Resources Group Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM9.73m. And it impressed us with free cash flow of RM18m, being 122% of its EBIT. So we don't think Heng Huat Resources Group Berhad's use of debt is risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Heng Huat Resources Group Berhad (including 1 which is significant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.