Is Country Heights Holdings Berhad (KLSE:CHHB) Using Debt In A Risky Way?

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.' 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. As with many other companies Country Heights Holdings Berhad (KLSE:CHHB) makes use of debt. 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Country Heights Holdings Berhad

How Much Debt Does Country Heights Holdings Berhad Carry?

As you can see below, at the end of June 2021, Country Heights Holdings Berhad had RM210.8m of debt, up from RM193.3m a year ago. Click the image for more detail. However, it also had RM12.1m in cash, and so its net debt is RM198.7m.

A Look At Country Heights Holdings Berhad's Liabilities

The latest balance sheet data shows that Country Heights Holdings Berhad had liabilities of RM290.9m due within a year, and liabilities of RM261.4m falling due after that. On the other hand, it had cash of RM12.1m and RM40.1m worth of receivables due within a year. So it has liabilities totalling RM500.2m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's RM393.9m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Country Heights Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM35m, which is a fall of 49%. To be frank that doesn't bode well.

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. Indeed, it lost RM23m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM13m over the last twelve months. So suffice it to say we consider the stock to be 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. For example, we've discovered 3 warning signs for Country Heights Holdings Berhad (2 are potentially serious!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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