David Iben put it well when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that HPMT Holdings Berhad (KLSE: HPMT) uses debt in its business. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for HPMT Holdings Berhad
What is the debt of HPMT Holdings Berhad?
You can click on the graph below for historical figures, but it shows that HPMT Holdings Berhad had RM27.0million in debt in June 2021, up from RM31.3million a year earlier. However, his balance sheet shows that he holds RM55.8million in cash, so he actually has a net cash position of RM28.8million.
A look at the liabilities of HPMT Holdings Berhad
We can see from the most recent balance sheet that HPMT Holdings Berhad had liabilities of RM 19.3 million due within one year and liabilities of RM 23.7 million due beyond. In compensation for these obligations, he had cash of RM 55.8 million as well as receivables valued at RM 20.4 million due within 12 months. So he can boast of having 33.3 million RM more in liquid assets than total Liabilities.
This short-term liquidity is a sign that HPMT Holdings Berhad could likely repay its debt with ease, as its balance sheet is far from tight. Put simply, the fact that HPMT Holdings Berhad has more cash than debt is arguably a good indication that it can safely manage its debt.
On top of that, HPMT Holdings Berhad has increased its EBIT by 62% over the past twelve months, and this growth will make it easier to process its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine HPMT Holdings Berhad’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a company cannot pay its debts with paper profits; he needs hard cash. HPMT Holdings Berhad may have net cash on the balance sheet, but it’s always interesting to examine how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and ability to manage debt. Over the past three years, HPMT Holdings Berhad has recorded free cash flow of 31% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.
While it is always a good idea to investigate a company’s debt, in this case HPMT Holdings Berhad has RM28.8million in net cash and a decent balance sheet. And it impressed us with its 62% EBIT growth over last year. We therefore do not believe that the use of debt by HPMT Holdings Berhad is risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 3 warning signs for HPMT Holdings Berhad that you need to be aware of.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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