Is Heng Huat Resources Group Berhad (KLSE:HHGROUP) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Heng Huat Resources Group Berhad (KLSE:HHGROUP) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Heng Huat Resources Group Berhad

What Is Heng Huat Resources Group Berhad's Net Debt?

As you can see below, Heng Huat Resources Group Berhad had RM29.6m of debt at September 2020, down from RM43.2m a year prior. On the flip side, it has RM6.22m in cash leading to net debt of about RM23.4m.

A Look At Heng Huat Resources Group Berhad's Liabilities

According to the last reported balance sheet, Heng Huat Resources Group Berhad had liabilities of RM58.9m due within 12 months, and liabilities of RM14.0m due beyond 12 months. On the other hand, it had cash of RM6.22m and RM21.8m worth of receivables due within a year. So it has liabilities totalling RM44.9m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM11.2m 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'd watch its balance sheet closely, without a doubt. After all, Heng Huat Resources Group Berhad would likely require a major re-capitalisation if it had to pay its creditors today. 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.

In the last year Heng Huat Resources Group Berhad had a loss before interest and tax, and actually shrunk its revenue by 39%, to RM61m. To be frank that doesn't bode well.

Caveat Emptor

While Heng Huat Resources Group Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM31m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost RM42m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Heng Huat Resources Group Berhad (2 are potentially serious) you should be aware of.

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. 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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