Is Heng Huat Resources Group Berhad (KLSE:HHGROUP) 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. We can see that Heng Huat Resources Group Berhad (KLSE:HHGROUP) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Heng Huat Resources Group Berhad

What Is Heng Huat Resources Group Berhad's Debt?

The image below, which you can click on for greater detail, shows that Heng Huat Resources Group Berhad had debt of RM7.91m at the end of September 2021, a reduction from RM29.6m over a year. But it also has RM15.3m in cash to offset that, meaning it has RM7.39m 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 RM24.8m due within a year, and liabilities of RM11.6m falling due after that. On the other hand, it had cash of RM15.3m and RM17.4m worth of receivables due within a year. So it has liabilities totalling RM3.72m more than its cash and near-term receivables, combined.

Of course, Heng Huat Resources Group Berhad has a market capitalization of RM114.3m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Heng Huat Resources Group Berhad reported revenue of RM83m, which is a gain of 36%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Heng Huat Resources Group Berhad?

Although Heng Huat Resources Group Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM6.0m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Heng Huat Resources Group Berhad shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Heng Huat Resources Group Berhad (of which 2 are potentially serious!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.