Hextar Capital Berhad (KLSE:HEXCAP) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hextar Capital Berhad

What Is Hextar Capital Berhad's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Hextar Capital Berhad had debt of RM27.0m, up from none in one year. However, it does have RM72.9m in cash offsetting this, leading to net cash of RM45.9m.

How Strong Is Hextar Capital Berhad's Balance Sheet?

According to the last reported balance sheet, Hextar Capital Berhad had liabilities of RM73.9m due within 12 months, and liabilities of RM33.8m due beyond 12 months. Offsetting these obligations, it had cash of RM72.9m as well as receivables valued at RM131.3m due within 12 months. So it can boast RM96.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Hextar Capital Berhad's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Hextar Capital Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Hextar Capital Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM2.6m in EBIT over the last twelve months. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hextar Capital Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Hextar Capital Berhad saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hextar Capital Berhad has RM45.9m in net cash and a decent-looking balance sheet. So we don't have any problem with Hextar Capital Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Hextar Capital Berhad (1 can't be ignored!) that you should be aware of before investing here.

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.

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

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.