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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Hubline Berhad (KLSE:HUBLINE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hubline Berhad

What Is Hubline Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Hubline Berhad had RM88.6m of debt, an increase on RM83.0m, over one year. However, because it has a cash reserve of RM46.4m, its net debt is less, at about RM42.2m.

How Healthy Is Hubline Berhad's Balance Sheet?

The latest balance sheet data shows that Hubline Berhad had liabilities of RM133.7m due within a year, and liabilities of RM45.8m falling due after that. On the other hand, it had cash of RM46.4m and RM33.5m worth of receivables due within a year. So its liabilities total RM99.6m more than the combination of its cash and short-term receivables.

Hubline Berhad has a market capitalization of RM343.1m, so it could very likely raise cash to ameliorate 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 it is Hubline Berhad's earnings that will influence how the balance sheet holds up in the future. 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 RM214m, which is a fall of 7.1%. We would much prefer see growth.

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 RM1.3m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of RM269k. So we do think this stock is quite risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Hubline Berhad (including 1 which is significant) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.