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.' 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. We note that Harn Len Corporation Bhd (KLSE:HARNLEN) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Harn Len Corporation Bhd Carry?
As you can see below, Harn Len Corporation Bhd had RM62.9m of debt at September 2021, down from RM71.8m a year prior. On the flip side, it has RM27.1m in cash leading to net debt of about RM35.8m.
How Healthy Is Harn Len Corporation Bhd's Balance Sheet?
According to the last reported balance sheet, Harn Len Corporation Bhd had liabilities of RM75.4m due within 12 months, and liabilities of RM67.4m due beyond 12 months. Offsetting this, it had RM27.1m in cash and RM28.6m in receivables that were due within 12 months. So its liabilities total RM87.1m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Harn Len Corporation Bhd has a market capitalization of RM164.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 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, Harn Len Corporation Bhd reported revenue of RM200m, which is a gain of 59%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Despite the top line growth, Harn Len Corporation Bhd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM132m at the EBIT level. 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. However, it doesn't help that it burned through RM43m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Harn Len Corporation Bhd is showing 2 warning signs in our investment analysis , you should know about...
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.
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.