David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Hume Cement Industries Berhad (KLSE:HUMEIND) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Hume Cement Industries Berhad's Net Debt?
The image below, which you can click on for greater detail, shows that Hume Cement Industries Berhad had debt of RM620.3m at the end of March 2021, a reduction from RM709.1m over a year. However, because it has a cash reserve of RM73.1m, its net debt is less, at about RM547.2m.
How Healthy Is Hume Cement Industries Berhad's Balance Sheet?
The latest balance sheet data shows that Hume Cement Industries Berhad had liabilities of RM445.5m due within a year, and liabilities of RM422.9m falling due after that. On the other hand, it had cash of RM73.1m and RM45.6m worth of receivables due within a year. So its liabilities total RM749.7m more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company's market capitalization of RM571.1m, we think shareholders really should watch Hume Cement Industries Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Hume Cement Industries 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, Hume Cement Industries Berhad made a loss at the EBIT level, and saw its revenue drop to RM570m, which is a fall of 15%. That's not what we would hope to see.
While Hume Cement Industries Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost RM7.7m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of RM26m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. We've identified 1 warning sign with Hume Cement Industries Berhad , and understanding them should be part of your investment process.
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.
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