Hong Leong Asia (SGX:H22) Has A Pretty Healthy Balance Sheet

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. As with many other companies Hong Leong Asia Ltd. (SGX:H22) makes use of debt. But should shareholders be worried about its use of debt?

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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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Hong Leong Asia's Net Debt?

The image below, which you can click on for greater detail, shows that Hong Leong Asia had debt of S$791.1m at the end of June 2025, a reduction from S$938.6m over a year. However, it does have S$1.54b in cash offsetting this, leading to net cash of S$749.4m.

A Look At Hong Leong Asia's Liabilities

We can see from the most recent balance sheet that Hong Leong Asia had liabilities of S$3.66b falling due within a year, and liabilities of S$400.4m due beyond that. Offsetting these obligations, it had cash of S$1.54b as well as receivables valued at S$2.51b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Hong Leong Asia's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the S$1.80b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Hong Leong Asia boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Hong Leong Asia

Unfortunately, Hong Leong Asia saw its EBIT slide 8.8% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hong Leong Asia can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hong Leong Asia 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, Hong Leong Asia 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Hong Leong Asia has S$749.4m in net cash. And it impressed us with free cash flow of S$507m, being 235% of its EBIT. So we don't have any problem with Hong Leong Asia's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Hong Leong Asia insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.