Heineken Malaysia Berhad (KLSE:HEIM) Has A Pretty Healthy Balance Sheet

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. As with many other companies Heineken Malaysia Berhad (KLSE:HEIM) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Heineken Malaysia Berhad

What Is Heineken Malaysia Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Heineken Malaysia Berhad had RM250.0m of debt, an increase on RM98.0m, over one year. However, it also had RM132.7m in cash, and so its net debt is RM117.3m.

How Strong Is Heineken Malaysia Berhad's Balance Sheet?

We can see from the most recent balance sheet that Heineken Malaysia Berhad had liabilities of RM656.0m falling due within a year, and liabilities of RM34.9m due beyond that. Offsetting these obligations, it had cash of RM132.7m as well as receivables valued at RM336.7m due within 12 months. So it has liabilities totalling RM221.4m more than its cash and near-term receivables, combined.

Since publicly traded Heineken Malaysia Berhad shares are worth a total of RM7.64b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Heineken Malaysia Berhad's net debt is only 0.43 times its EBITDA. And its EBIT covers its interest expense a whopping 42.7 times over. So we're pretty relaxed about its super-conservative use of debt. It is just as well that Heineken Malaysia Berhad's load is not too heavy, because its EBIT was down 49% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Heineken Malaysia Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Heineken Malaysia Berhad produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

The good news is that Heineken Malaysia Berhad's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But we must concede we find its EBIT growth rate has the opposite effect. Looking at all the aforementioned factors together, it strikes us that Heineken Malaysia Berhad can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. For example Heineken Malaysia Berhad has 3 warning signs (and 1 which is a bit unpleasant) we think 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.

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