Harbour-Link Group Berhad (KLSE:HARBOUR) Seems To Use Debt Rather Sparingly

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. We note that Harbour-Link Group Berhad (KLSE:HARBOUR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Harbour-Link Group Berhad

What Is Harbour-Link Group Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Harbour-Link Group Berhad had debt of RM63.5m, up from RM20.6m in one year. But it also has RM400.7m in cash to offset that, meaning it has RM337.2m net cash.

A Look At Harbour-Link Group Berhad's Liabilities

The latest balance sheet data shows that Harbour-Link Group Berhad had liabilities of RM219.8m due within a year, and liabilities of RM45.7m falling due after that. Offsetting these obligations, it had cash of RM400.7m as well as receivables valued at RM201.9m due within 12 months. So it actually has RM337.1m more liquid assets than total liabilities.

This surplus strongly suggests that Harbour-Link Group Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Harbour-Link Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Harbour-Link Group Berhad grew its EBIT by 118% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Harbour-Link Group 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Harbour-Link Group Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Harbour-Link Group Berhad actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Harbour-Link Group Berhad has net cash of RM337.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in RM205m. At the end of the day we're not concerned about Harbour-Link Group Berhad's debt. 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 instance, we've identified 1 warning sign for Harbour-Link Group 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.