Is GUH Holdings Berhad (KLSE:GUH) A Risky Investment?

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. As with many other companies GUH Holdings Berhad (KLSE:GUH) makes use of debt. But is this debt a concern to shareholders?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for GUH Holdings Berhad

How Much Debt Does GUH Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that GUH Holdings Berhad had RM44.8m of debt in March 2021, down from RM56.9m, one year before. However, its balance sheet shows it holds RM71.9m in cash, so it actually has RM27.1m net cash.

How Healthy Is GUH Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that GUH Holdings Berhad had liabilities of RM85.7m due within a year, and liabilities of RM41.3m falling due after that. Offsetting these obligations, it had cash of RM71.9m as well as receivables valued at RM62.3m due within 12 months. So it actually has RM7.21m more liquid assets than total liabilities.

This surplus suggests that GUH Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, GUH Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since GUH 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 GUH Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 24%, to RM241m. That makes us nervous, to say the least.

So How Risky Is GUH Holdings Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year GUH Holdings Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM14m of cash and made a loss of RM38m. Given it only has net cash of RM27.1m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 GUH Holdings Berhad has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.