We Think Heineken Malaysia Berhad (KLSE:HEIM) Can Manage Its Debt With Ease

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.' 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 can see that Heineken Malaysia Berhad (KLSE:HEIM) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Heineken Malaysia Berhad

What Is Heineken Malaysia Berhad's Debt?

The image below, which you can click on for greater detail, shows that Heineken Malaysia Berhad had debt of RM20.0m at the end of March 2022, a reduction from RM80.0m over a year. However, it does have RM55.8m in cash offsetting this, leading to net cash of RM35.8m.

How Healthy Is Heineken Malaysia Berhad's Balance Sheet?

According to the last reported balance sheet, Heineken Malaysia Berhad had liabilities of RM523.3m due within 12 months, and liabilities of RM32.2m due beyond 12 months. Offsetting these obligations, it had cash of RM55.8m as well as receivables valued at RM444.5m due within 12 months. So it has liabilities totalling RM55.1m more than its cash and near-term receivables, combined.

This state of affairs indicates that Heineken Malaysia Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM7.40b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Heineken Malaysia Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Heineken Malaysia Berhad has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Heineken Malaysia Berhad 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 three years, Heineken Malaysia Berhad produced sturdy free cash flow equating to 71% 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.

Summing up

We could understand if investors are concerned about Heineken Malaysia Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM35.8m. And it impressed us with its EBIT growth of 59% over the last year. So is Heineken Malaysia Berhad's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Heineken Malaysia Berhad that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.