Is Harn Len Corporation Bhd (KLSE:HARNLEN) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Harn Len Corporation Bhd (KLSE:HARNLEN) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Harn Len Corporation Bhd

How Much Debt Does Harn Len Corporation Bhd Carry?

As you can see below, Harn Len Corporation Bhd had RM60.2m of debt at March 2022, down from RM68.3m a year prior. However, it also had RM28.0m in cash, and so its net debt is RM32.2m.

How Strong Is Harn Len Corporation Bhd's Balance Sheet?

According to the last reported balance sheet, Harn Len Corporation Bhd had liabilities of RM76.9m due within 12 months, and liabilities of RM59.0m due beyond 12 months. On the other hand, it had cash of RM28.0m and RM13.2m worth of receivables due within a year. So it has liabilities totalling RM94.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Harn Len Corporation Bhd is worth RM278.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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 Harn Len Corporation Bhd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Harn Len Corporation Bhd wasn't profitable at an EBIT level, but managed to grow its revenue by 71%, to RM222m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Harn Len Corporation Bhd still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM2.1m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM18m into a profit. So to be blunt we do think it is risky. 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. We've identified 3 warning signs with Harn Len Corporation Bhd , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.