We Think Hubline Berhad (KLSE:HUBLINE) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Hubline Berhad (KLSE:HUBLINE) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hubline Berhad

How Much Debt Does Hubline Berhad Carry?

As you can see below, at the end of March 2024, Hubline Berhad had RM89.1m of debt, up from RM83.9m a year ago. Click the image for more detail. However, it does have RM44.7m in cash offsetting this, leading to net debt of about RM44.4m.

How Strong Is Hubline Berhad's Balance Sheet?

The latest balance sheet data shows that Hubline Berhad had liabilities of RM135.4m due within a year, and liabilities of RM47.9m falling due after that. Offsetting this, it had RM44.7m in cash and RM37.8m in receivables that were due within 12 months. So it has liabilities totalling RM100.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Hubline Berhad is worth RM450.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hubline Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Hubline Berhad made a loss at the EBIT level, and saw its revenue drop to RM216m, which is a fall of 8.3%. That's not what we would hope to see.

Caveat Emptor

Importantly, Hubline Berhad had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM378k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of RM5.0m and the profit of RM450k. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Hubline Berhad you should be aware of, and 1 of them doesn't sit too well with us.

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.

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