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

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.' 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. As with many other companies Harbour-Link Group Berhad (KLSE:HARBOUR) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Harbour-Link Group Berhad

What Is Harbour-Link Group Berhad's Debt?

The image below, which you can click on for greater detail, shows that Harbour-Link Group Berhad had debt of RM46.3m at the end of December 2020, a reduction from RM58.7m over a year. But it also has RM180.5m in cash to offset that, meaning it has RM134.3m net cash.

A Look At Harbour-Link Group Berhad's Liabilities

According to the last reported balance sheet, Harbour-Link Group Berhad had liabilities of RM150.5m due within 12 months, and liabilities of RM57.6m due beyond 12 months. Offsetting these obligations, it had cash of RM180.5m as well as receivables valued at RM150.6m due within 12 months. So it actually has RM123.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that Harbour-Link Group 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 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 4.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Harbour-Link Group Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Harbour-Link Group Berhad produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 RM134.3m, as well as more liquid assets than liabilities. So we don't think Harbour-Link Group Berhad's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Harbour-Link Group Berhad 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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