Hartalega Holdings Berhad (KLSE:HARTA) Has A Pretty 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.' 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 Hartalega Holdings Berhad (KLSE:HARTA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hartalega Holdings Berhad

How Much Debt Does Hartalega Holdings Berhad Carry?

As you can see below, Hartalega Holdings Berhad had RM41.8m of debt at June 2024, down from RM134.9m a year prior. But on the other hand it also has RM1.39b in cash, leading to a RM1.35b net cash position.

A Look At Hartalega Holdings Berhad's Liabilities

The latest balance sheet data shows that Hartalega Holdings Berhad had liabilities of RM378.4m due within a year, and liabilities of RM229.1m falling due after that. Offsetting this, it had RM1.39b in cash and RM426.1m in receivables that were due within 12 months. So it actually has RM1.21b 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 was also good to see that despite losing money on the EBIT line last year, Hartalega Holdings Berhad turned things around in the last 12 months, delivering and EBIT of RM129m. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last year, Hartalega Holdings Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hartalega Holdings Berhad has net cash of RM1.35b, as well as more liquid assets than liabilities. So we are not troubled with Hartalega Holdings Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hartalega Holdings Berhad is showing 1 warning sign in our investment analysis , 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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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.