HeveaBoard Berhad (KLSE:HEVEA) Has A Rock Solid Balance Sheet

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.' 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. We note that HeveaBoard Berhad (KLSE:HEVEA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for HeveaBoard Berhad

What Is HeveaBoard Berhad's Debt?

As you can see below, HeveaBoard Berhad had RM6.46m of debt at June 2021, down from RM8.50m a year prior. However, it does have RM106.4m in cash offsetting this, leading to net cash of RM99.9m.

How Healthy Is HeveaBoard Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HeveaBoard Berhad had liabilities of RM55.9m due within 12 months and liabilities of RM14.7m due beyond that. Offsetting these obligations, it had cash of RM106.4m as well as receivables valued at RM35.6m due within 12 months. So it can boast RM71.5m 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!

On top of that, HeveaBoard Berhad grew its EBIT by 77% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if HeveaBoard 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. HeveaBoard 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 last three years, HeveaBoard Berhad actually produced more free cash flow than EBIT. 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 RM99.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM11m, being 318% of its EBIT. The bottom line is that we do not find HeveaBoard Berhad's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for HeveaBoard Berhad that you should be aware of.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.