Is Hartalega Holdings Berhad (KLSE:HARTA) Using Too Much Debt?

Warren Buffett famously said, '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. Importantly, Hartalega Holdings Berhad (KLSE:HARTA) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hartalega Holdings Berhad

What Is Hartalega Holdings Berhad's Debt?

As you can see below, Hartalega Holdings Berhad had RM149.6m of debt at March 2023, down from RM238.8m a year prior. However, its balance sheet shows it holds RM1.72b in cash, so it actually has RM1.57b net cash.

How Strong Is Hartalega Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Hartalega Holdings Berhad had liabilities of RM352.4m due within a year, and liabilities of RM297.8m falling due after that. Offsetting these obligations, it had cash of RM1.72b as well as receivables valued at RM404.2m due within 12 months. So it can boast RM1.48b more liquid assets than total liabilities.

It's good to see that Hartalega Holdings Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues 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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Hartalega Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM2.4b, which is a fall of 69%. That makes us nervous, to say the least.

So How Risky Is Hartalega Holdings Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Hartalega Holdings Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM345m and booked a RM218m accounting loss. With only RM1.57b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.