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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Hartalega Holdings Berhad (KLSE:HARTA) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Hartalega Holdings Berhad

How Much Debt Does Hartalega Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Hartalega Holdings Berhad had RM134.9m of debt in June 2023, down from RM227.1m, one year before. But it also has RM1.67b in cash to offset that, meaning it has RM1.53b net cash.

A Look At Hartalega Holdings Berhad's Liabilities

The latest balance sheet data shows that Hartalega Holdings Berhad had liabilities of RM348.9m due within a year, and liabilities of RM271.1m falling due after that. Offsetting this, it had RM1.67b in cash and RM362.2m in receivables that were due within 12 months. So it can boast RM1.41b more liquid assets than total liabilities.

This excess liquidity suggests that Hartalega Holdings Berhad is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Hartalega Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 RM2.0b, which is a fall of 59%. 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 in the last year Hartalega Holdings Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM208m and booked a RM376m accounting loss. With only RM1.53b 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. For riskier companies like Hartalega Holdings Berhad I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.