Does Hartalega Holdings Berhad (KLSE:HARTA) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Hartalega Holdings Berhad (KLSE:HARTA) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hartalega Holdings Berhad

What Is Hartalega Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hartalega Holdings Berhad had RM112.5m of debt in September 2023, down from RM210.2m, one year before. However, its balance sheet shows it holds RM1.64b in cash, so it actually has RM1.53b net cash.

How Healthy Is Hartalega Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Hartalega Holdings Berhad had liabilities of RM326.2m due within 12 months, and liabilities of RM251.7m due beyond 12 months. Offsetting this, it had RM1.64b in cash and RM365.6m in receivables that were due within 12 months. So it actually has RM1.43b more liquid assets than total liabilities.

This excess liquidity suggests that Hartalega Holdings Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Hartalega Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Hartalega Holdings Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Hartalega Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM1.9b, which is a fall of 45%. To be frank that doesn't bode well.

So How Risky Is Hartalega Holdings Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Hartalega Holdings Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM314m and booked a RM377m accounting loss. Given it only has net cash of RM1.53b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Hartalega Holdings Berhad I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.