We Think Harn Len Corporation Bhd (KLSE:HARNLEN) Is Taking Some Risk With Its 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 Harn Len Corporation Bhd (KLSE:HARNLEN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

View our latest analysis for Harn Len Corporation Bhd

How Much Debt Does Harn Len Corporation Bhd Carry?

The image below, which you can click on for greater detail, shows that Harn Len Corporation Bhd had debt of RM73.3m at the end of September 2020, a reduction from RM100.0m over a year. However, its balance sheet shows it holds RM91.2m in cash, so it actually has RM17.9m net cash.

A Look At Harn Len Corporation Bhd's Liabilities

The latest balance sheet data shows that Harn Len Corporation Bhd had liabilities of RM153.7m due within a year, and liabilities of RM82.8m falling due after that. Offsetting this, it had RM91.2m in cash and RM48.0m in receivables that were due within 12 months. So it has liabilities totalling RM97.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM126.9m, so it does suggest shareholders should keep an eye on Harn Len Corporation Bhd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Harn Len Corporation Bhd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Harn Len Corporation Bhd made a loss at the EBIT level, last year, it was also good to see that it generated RM115m in EBIT over the last twelve months. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Harn Len Corporation Bhd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Harn Len Corporation Bhd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While Harn Len Corporation Bhd does have more liabilities than liquid assets, it also has net cash of RM17.9m. So while Harn Len Corporation Bhd does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Harn Len Corporation Bhd (1 is significant!) that you should be aware of before investing here.

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. 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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