HeveaBoard Berhad (KLSE:HEVEA) Could Easily Take On More Debt

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.' 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 HeveaBoard Berhad (KLSE:HEVEA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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 HeveaBoard Berhad

How Much Debt Does HeveaBoard Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that HeveaBoard Berhad had RM7.48m of debt in December 2020, down from RM9.53m, one year before. But on the other hand it also has RM127.9m in cash, leading to a RM120.4m net cash position.

How Healthy Is HeveaBoard Berhad's Balance Sheet?

The latest balance sheet data shows that HeveaBoard Berhad had liabilities of RM81.1m due within a year, and liabilities of RM15.8m falling due after that. On the other hand, it had cash of RM127.9m and RM42.7m worth of receivables due within a year. So it can boast RM73.7m more liquid assets than total liabilities.

It's good to see that HeveaBoard Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, HeveaBoard Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, HeveaBoard Berhad grew its EBIT by 5.4% in the last year, making that debt load look even more manageable. 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 HeveaBoard Berhad can strengthen its balance sheet over time. 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 HeveaBoard 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. Happily for any shareholders, HeveaBoard Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that HeveaBoard Berhad has net cash of RM120.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 242% of that EBIT to free cash flow, bringing in RM21m. So we don't think HeveaBoard Berhad's use of debt is risky. 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. Be aware that HeveaBoard Berhad is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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