We believe Hiap Teck Venture Berhad (KLSE: HIAPTEK) can manage its debt with ease
Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Hiap Teck Venture Berhad (KLSE: HIAPTEK) is in debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels together.
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What is the debt of Hiap Teck Venture Berhad?
As you can see below, Hiap Teck Venture Berhad had a debt of RM 411.1 million in July 2021, up from RM 506.3 million a year earlier. However, because it has a cash reserve of RM 176.6 million, its net debt is less, at around RM 234.5 million.
How strong is Hiap Teck Venture Berhad’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Hiap Teck Venture Berhad had liabilities of RM 464.6 million due within 12 months and RM 17.8 million liabilities beyond. On the other hand, he had a cash position of RM 176.6 million and RM 214.1 million of receivables due within one year. Thus, its liabilities total RM91.7 million more than the combination of its cash and short-term receivables.
Of course, Hiap Teck Venture Berhad has a market cap of RM1.07b, so these liabilities are probably manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
With a debt to EBITDA ratio of 1.6, Hiap Teck Venture Berhad uses debt smartly but responsibly. And the fact that her last twelve months of EBIT was 10.0 times her interest expense ties in with that theme. Even more impressively, Hiap Teck Venture Berhad increased its EBIT by 412% year over year. If sustained, this growth will make debt even more manageable in the years to come. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the future profitability of the business will decide whether Hiap Teck Venture Berhad can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Hiap Teck Venture Berhad has generated strong free cash flow equivalent to 71% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
The good news is that Hiap Teck Venture Berhad’s demonstrated ability to increase EBIT thrills us like a fluffy puppy does a toddler. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! Looking at the big picture, we think Hiap Teck Venture Berhad’s use of debt looks very reasonable and we don’t care. After all, reasonable leverage can increase returns on equity. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 3 warning signs for Hiap Teck Venture Berhad (1 should not be ignored) you should be aware of this.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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 does not have any position in the mentioned stocks.
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