Hartalega Holdings Berhad (KLSE:HARTA) Seems To Use Debt Quite Sensibly

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.' 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 note that Hartalega Holdings Berhad (KLSE:HARTA) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hartalega Holdings Berhad

What Is Hartalega Holdings Berhad's Net Debt?

As you can see below, Hartalega Holdings Berhad had RM19.9m of debt at September 2024, down from RM112.5m a year prior. However, it does have RM1.30b in cash offsetting this, leading to net cash of RM1.28b.

A Look At Hartalega Holdings Berhad's Liabilities

According to the last reported balance sheet, Hartalega Holdings Berhad had liabilities of RM301.8m due within 12 months, and liabilities of RM169.0m due beyond 12 months. Offsetting this, it had RM1.30b in cash and RM430.7m in receivables that were due within 12 months. So it can boast RM1.26b more liquid assets than total liabilities.

This short term liquidity is a sign that Hartalega Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 RM45m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hartalega Holdings Berhad's ability to maintain a healthy balance sheet going forward. 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. During the last year, Hartalega Holdings Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hartalega Holdings Berhad has RM1.28b in net cash and a decent-looking balance sheet. So we don't have any problem with Hartalega Holdings Berhad's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Hartalega Holdings Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

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.