Is Harn Len Corporation Bhd (KLSE: HARNLEN) using too much debt?
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Harn Len Corporation Bhd (KLSE: HARNLEN) is in debt. But should shareholders worry about its use of debt?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Harn Len Corporation Bhd
What is Harn Len Corporation Bhd’s debt?
As you can see below, Harn Len Corporation Bhd had a debt of RM60.2 million in March 2022, compared to RM68.3 million the previous year. However, he also had RM28.0 million in cash, so his net debt is RM32.2 million.
How strong is Harn Len Corporation Bhd’s balance sheet?
According to the latest published balance sheet, Harn Len Corporation Bhd had liabilities of RM76.9 million due within 12 months and liabilities of RM59.0 million due beyond 12 months. On the other hand, it had liquid assets of RM28.0 million and RM13.2 million of receivables due within the year. It therefore has liabilities totaling RM94.7 million more than its cash and short-term receivables, combined.
This shortfall is not that bad as Harn Len Corporation Bhd is worth RM278.5 million and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. But we definitely want to keep our eyes peeled for indications that its debt is too risky. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Harn Len Corporation Bhd that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Last year, Harn Len Corporation Bhd was not profitable in terms of EBIT, but managed to increase its turnover by 71% to RM222 million. With a little luck, the company will be able to progress towards profitability.
Despite the growth in revenue, Harn Len Corporation Bhd still posted a loss in earnings before interest and taxes (EBIT) over the past year. To be precise, the EBIT loss amounted to RM2.1 million. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has liabilities. Quite frankly, we think the track record falls short, although it could improve over time. We would feel better if he turned his RM18m year-over-year loss into a profit. So, to be frank, we think it’s risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 3 warning signs with Harn Len Corporation Bhd, and understanding them should be part of your investment process.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.