These 4 Measures Indicate That Harbour-Link Group Berhad (KLSE:HARBOUR) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Harbour-Link Group Berhad

What Is Harbour-Link Group Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Harbour-Link Group Berhad had RM42.6m of debt in September 2020, down from RM68.2m, one year before. However, its balance sheet shows it holds RM154.3m in cash, so it actually has RM111.7m net cash.

How Strong Is Harbour-Link Group Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Harbour-Link Group Berhad had liabilities of RM117.7m due within 12 months and liabilities of RM62.5m due beyond that. Offsetting this, it had RM154.3m in cash and RM139.6m in receivables that were due within 12 months. So it can boast RM113.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that Harbour-Link Group Berhad's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. 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.

Fortunately, Harbour-Link Group Berhad grew its EBIT by 8.8% in the last year, making that debt load look even more manageable. 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 company can only pay off debt with cold hard cash, not accounting profits. While Harbour-Link Group 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. During the last three years, Harbour-Link Group Berhad produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Harbour-Link Group Berhad has RM111.7m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 8.8% over the last year. So is Harbour-Link Group Berhad's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Harbour-Link Group Berhad (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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. 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.
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