Is GUH Holdings Berhad (KLSE:GUH) Using Debt Sensibly?

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.' 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. We note that GUH Holdings Berhad (KLSE:GUH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GUH Holdings Berhad

How Much Debt Does GUH Holdings Berhad Carry?

As you can see below, GUH Holdings Berhad had RM60.7m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM106.1m in cash offsetting this, leading to net cash of RM45.4m.

A Look At GUH Holdings Berhad's Liabilities

The latest balance sheet data shows that GUH Holdings Berhad had liabilities of RM99.2m due within a year, and liabilities of RM60.6m falling due after that. Offsetting these obligations, it had cash of RM106.1m as well as receivables valued at RM63.5m due within 12 months. So it can boast RM9.86m more liquid assets than total liabilities.

This short term liquidity is a sign that GUH Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that GUH Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 22%, to RM261m. That makes us nervous, to say the least.

So How Risky Is GUH Holdings Berhad?

Although GUH Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM4.0m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for GUH Holdings Berhad (1 is concerning!) that you should be aware of before investing here.

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.

If you decide to trade GUH Holdings Berhad, 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@simplywallst.com.