Here's Why Hartalega Holdings Berhad (KLSE:HARTA) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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.

We've discovered 1 warning sign about Hartalega Holdings Berhad. View them for free.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Hartalega Holdings Berhad Carry?

As you can see below, Hartalega Holdings Berhad had RM8.18m of debt at December 2024, down from RM87.4m a year prior. However, it does have RM827.4m in cash offsetting this, leading to net cash of RM819.2m.

A Look At Hartalega Holdings Berhad's Liabilities

According to the last reported balance sheet, Hartalega Holdings Berhad had liabilities of RM345.5m due within 12 months, and liabilities of RM180.4m due beyond 12 months. Offsetting this, it had RM827.4m in cash and RM602.2m in receivables that were due within 12 months. So it actually has RM903.7m 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!

See our latest analysis for Hartalega Holdings Berhad

Better yet, Hartalega Holdings Berhad grew its EBIT by 203% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hartalega Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Hartalega Holdings Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hartalega Holdings Berhad has RM819.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 203% over the last year. So is Hartalega Holdings Berhad's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Hartalega Holdings Berhad , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.