Hextar Capital Berhad (KLSE:HEXCAP) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Hextar Capital Berhad (KLSE:HEXCAP) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hextar Capital Berhad

How Much Debt Does Hextar Capital Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hextar Capital Berhad had RM78.9m of debt, an increase on RM27.0m, over one year. On the flip side, it has RM37.9m in cash leading to net debt of about RM41.0m.

How Healthy Is Hextar Capital Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hextar Capital Berhad had liabilities of RM113.8m due within 12 months and liabilities of RM56.8m due beyond that. Offsetting this, it had RM37.9m in cash and RM158.1m in receivables that were due within 12 months. So it can boast RM25.4m more liquid assets than total liabilities.

This excess liquidity suggests that Hextar Capital Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hextar Capital Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Hextar Capital Berhad made a loss at the EBIT level, and saw its revenue drop to RM118m, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

Not only did Hextar Capital Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM13m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Hextar Capital Berhad that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.