Heng Hup Holdings (HKG: 1891) has a fairly healthy balance sheet
David Iben put it right 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. It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We notice that Heng Hup Holdings Limited (HKG: 1891) has debt on its balance sheet. But the most important question is: what is the risk that this debt creates?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting shareholders because lenders are forcing them to raise capital at a difficult price. That said, the most common situation is where a business manages its debt reasonably well – and to its advantage. The first thing to do when considering how much debt a business is using is to look at its cash flow and debt together.
Check out our latest analysis for Heng Hup Holdings
What is the net debt of Heng Hup Holdings?
As you can see below, at the end of December 2020, Heng Hup Holdings had RM20.0 million in debt, up from RM 7.83 million a year ago. Click on the image for more details. But he also has RM26.2million in cash to make up for this, which means he has a net cash of RM6.21million.
How strong is Heng Hup Holdings’ balance sheet?
According to the latest published balance sheet, Heng Hup Holdings had liabilities of RM38 million due within 12 months and liabilities of RM 6.53 million beyond 12 months. In return for these obligations, he had cash of RM26.2 million as well as receivables valued at RM 119.6 million and due within 12 months. So, it can boast of RM101.2 million more liquid assets than total Liabilities.
This excess liquidity suggests that Heng Hup Holdings’ balance sheet could take a hit just as well as Homer’s Simpson’s head can take a punch. From this point of view, lenders should feel as secure as the beloved of a black belt karate master. In short, Heng Hup Holdings has clear cash flow, so it’s fair to say that it doesn’t have heavy debt!
And we also warmly note that Heng Hup Holdings increased its EBIT by 11% last year, making its debt more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at the debt in total isolation; since Heng Hup Holdings will need revenue to service this debt. So when you consider debt, it’s really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits do not reduce it. Although Heng Hup Holdings has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is. builds (or erodes) that cash balance. In the past three years, Heng Hup Holdings has burned a lot of money. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.
While we sympathize with investors who find debt worrying, the bottom line is that Heng Hup Holdings has net cash of RM6.21million and plenty of liquid assets. And it has also increased its EBIT by 11% over the past year. We therefore do not believe that the use of debt by Heng Hup Holdings is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that Heng Hup Holdings displays 3 warning signs in our investment analysis , and 1 of those is a bit disturbing …
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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