Would Heng Huat Resources Group Berhad (KLSE:HHGROUP) Be Better Off With Less 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 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 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?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Heng Huat Resources Group Berhad

How Much Debt Does Heng Huat Resources Group Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Heng Huat Resources Group Berhad had RM14.2m of debt in December 2020, down from RM48.9m, one year before. However, it also had RM6.09m in cash, and so its net debt is RM8.12m.

How Strong Is Heng Huat Resources Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Heng Huat Resources Group Berhad had liabilities of RM26.4m falling due within a year, and liabilities of RM14.3m due beyond that. Offsetting these obligations, it had cash of RM6.09m as well as receivables valued at RM15.7m due within 12 months. So it has liabilities totalling RM19.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Heng Huat Resources Group Berhad has a market capitalization of RM49.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Heng Huat Resources Group 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.

Over 12 months, Heng Huat Resources Group Berhad made a loss at the EBIT level, and saw its revenue drop to RM66m, which is a fall of 26%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Heng Huat Resources Group Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM28m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM39m. So to be blunt we do think it is 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. To that end, you should learn about the 4 warning signs we've spotted with Heng Huat Resources Group Berhad (including 2 which can't be ignored) .

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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