Is Country Heights Holdings Berhad (KLSE:CHHB) Weighed On By Its Debt Load?

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.' 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. Importantly, Country Heights Holdings Berhad (KLSE:CHHB) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Country Heights Holdings Berhad

How Much Debt Does Country Heights Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that Country Heights Holdings Berhad had debt of RM107.8m at the end of March 2023, a reduction from RM199.8m over a year. However, it also had RM8.55m in cash, and so its net debt is RM99.2m.

A Look At Country Heights Holdings Berhad's Liabilities

We can see from the most recent balance sheet that Country Heights Holdings Berhad had liabilities of RM260.9m falling due within a year, and liabilities of RM229.8m due beyond that. Offsetting these obligations, it had cash of RM8.55m as well as receivables valued at RM42.4m due within 12 months. So its liabilities total RM439.8m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM96.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Country Heights Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Country Heights Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Country Heights Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 55%, to RM48m. That makes us nervous, to say the least.

Caveat Emptor

While Country Heights Holdings 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. Its EBIT loss was a whopping RM25m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of RM90m in the last year. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Country Heights Holdings Berhad is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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. 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.