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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Hartalega Holdings Berhad (KLSE:HARTA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hartalega Holdings Berhad

What Is Hartalega Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Hartalega Holdings Berhad had RM66.6m of debt in March 2024, down from RM149.6m, one year before. However, its balance sheet shows it holds RM1.43b in cash, so it actually has RM1.36b net cash.

How Healthy Is Hartalega Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hartalega Holdings Berhad had liabilities of RM384.5m due within 12 months and liabilities of RM228.3m due beyond that. Offsetting this, it had RM1.43b in cash and RM466.0m in receivables that were due within 12 months. So it can boast RM1.28b more liquid assets than total liabilities.

This surplus suggests that Hartalega Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hartalega Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Hartalega Holdings Berhad's load is not too heavy, because its EBIT was down 66% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hartalega Holdings 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. Looking at the most recent three years, Hartalega Holdings Berhad recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hartalega Holdings Berhad has net cash of RM1.36b, as well as more liquid assets than liabilities. So we are not troubled with Hartalega Holdings Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Hartalega Holdings Berhad .

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com