Is Hartalega Holdings Berhad (KLSE:HARTA) A Risky Investment?

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.' 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. Importantly, Hartalega Holdings Berhad (KLSE:HARTA) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

What Is Hartalega Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that Hartalega Holdings Berhad had debt of RM210.2m at the end of September 2022, a reduction from RM302.5m over a year. However, its balance sheet shows it holds RM1.99b in cash, so it actually has RM1.78b net cash.

A Look At Hartalega Holdings Berhad's Liabilities

We can see from the most recent balance sheet that Hartalega Holdings Berhad had liabilities of RM442.1m falling due within a year, and liabilities of RM386.0m due beyond that. On the other hand, it had cash of RM1.99b and RM334.2m worth of receivables due within a year. So it can boast RM1.50b 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.

It is just as well that Hartalega Holdings Berhad's load is not too heavy, because its EBIT was down 89% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 most recent three years, Hartalega Holdings Berhad recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hartalega Holdings Berhad has RM1.78b in net cash and a decent-looking balance sheet. 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. For example Hartalega Holdings Berhad has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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.