We Think HPP Holdings Berhad (KLSE:HPPHB) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, HPP Holdings Berhad (KLSE:HPPHB) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for HPP Holdings Berhad

What Is HPP Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that HPP Holdings Berhad had RM16.1m of debt in November 2024, down from RM17.9m, one year before. But it also has RM25.2m in cash to offset that, meaning it has RM9.08m net cash.

How Strong Is HPP Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that HPP Holdings Berhad had liabilities of RM12.6m due within a year, and liabilities of RM21.8m falling due after that. Offsetting this, it had RM25.2m in cash and RM25.5m in receivables that were due within 12 months. So it actually has RM16.3m more liquid assets than total liabilities.

This surplus suggests that HPP Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, HPP Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, HPP Holdings Berhad's EBIT fell a jaw-dropping 68% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 HPP Holdings 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 HPP Holdings 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. Over the last three years, HPP Holdings Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HPP Holdings Berhad has net cash of RM9.08m, as well as more liquid assets than liabilities. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in RM7.1m. So we don't have any problem with HPP Holdings Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for HPP Holdings Berhad you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.