Is Hiap Hoe (SGX:5JK) Weighed On By Its Debt Load?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Hiap Hoe Limited (SGX:5JK) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Hiap Hoe

What Is Hiap Hoe's Net Debt?

The chart below, which you can click on for greater detail, shows that Hiap Hoe had S$720.2m in debt in December 2020; about the same as the year before. However, because it has a cash reserve of S$116.4m, its net debt is less, at about S$603.8m.

How Strong Is Hiap Hoe's Balance Sheet?

The latest balance sheet data shows that Hiap Hoe had liabilities of S$522.7m due within a year, and liabilities of S$329.7m falling due after that. Offsetting this, it had S$116.4m in cash and S$7.34m in receivables that were due within 12 months. So it has liabilities totalling S$728.6m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the S$305.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Hiap Hoe would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hiap Hoe's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hiap Hoe had a loss before interest and tax, and actually shrunk its revenue by 40%, to S$80m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hiap Hoe's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at S$22m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of S$37m. And until that time we think this is a risky stock. 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. For example, we've discovered 2 warning signs for Hiap Hoe that you should be aware of before investing here.

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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