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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Country Heights Holdings Berhad (KLSE:CHHB) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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.
How Much Debt Does Country Heights Holdings Berhad Carry?
As you can see below, Country Heights Holdings Berhad had RM194.3m of debt at September 2020, down from RM226.9m a year prior. However, it does have RM7.40m in cash offsetting this, leading to net debt of about RM186.9m.
How Healthy Is Country Heights Holdings Berhad's Balance Sheet?
We can see from the most recent balance sheet that Country Heights Holdings Berhad had liabilities of RM258.8m falling due within a year, and liabilities of RM307.3m due beyond that. On the other hand, it had cash of RM7.40m and RM41.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM517.6m.
When you consider that this deficiency exceeds the company's RM391.2m market capitalization, you might well be inclined to review the balance sheet intently. 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 you can't view debt in total isolation; since Country Heights Holdings Berhad will need earnings to service that debt. 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 RM53m, which is a fall of 46%. To be frank that doesn't bode well.
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 RM18m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of RM37m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. For example - Country Heights Holdings Berhad has 1 warning sign we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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