Is Country Heights Holdings Berhad (KLSE:CHHB) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Country Heights Holdings Berhad (KLSE:CHHB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

What Is Country Heights Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that Country Heights Holdings Berhad had debt of RM193.3m at the end of June 2020, a reduction from RM231.3m over a year. On the flip side, it has RM7.44m in cash leading to net debt of about RM185.9m.

How Healthy Is Country Heights Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Country Heights Holdings Berhad had liabilities of RM250.8m due within a year, and liabilities of RM308.2m falling due after that. Offsetting these obligations, it had cash of RM7.44m as well as receivables valued at RM38.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM513.5m.

This deficit casts a shadow over the RM341.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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 it is Country Heights Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Country Heights Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM69m, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Country Heights Holdings Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM17m. 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. For example, we would not want to see a repeat of last year's loss of RM41m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Country Heights Holdings Berhad is showing 2 warning signs in our investment analysis , you should know about...

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. 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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