Hextar Global Berhad (KLSE: HEXTAR) has a rock solid balance sheet
Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It is 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. Like many other companies Hextar Global Berhad (KLSE: HEXTAR) uses debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Hextar Global Berhad
What is the debt of Hextar Global Berhad?
The image below, which you can click for more details, shows that Hextar Global Berhad had a debt of RM 103.5 million at the end of June 2021, a reduction from RM 131.9 million on a year. However, because it has a cash reserve of 28.9 million ringgit, its net debt is less, at around 74.6 million ringgit.
How strong is Hextar Global Berhad’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Hextar Global Berhad had liabilities of RM 133.1 million due within 12 months and RM 17.2 million liabilities due beyond. In return, he had RM 28.9 million in cash and RM 170.5 million in receivables due within 12 months. So he actually has RM49.1m Following liquid assets as total liabilities.
This surplus suggests that Hextar Global Berhad has a prudent balance sheet and could likely eliminate its debt without too much difficulty.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization charges.
Hextar Global Berhad’s net debt is only 1.3 times its EBITDA. And its EBIT covers its interest costs 26.9 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. The good news is that Hextar Global Berhad increased its EBIT by 7.8% year-over-year, which should allay concerns about debt repayment. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Hextar Global 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.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Hextar Global Berhad has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
Hextar Global Berhad’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! When zoomed out, Hextar Global Berhad appears to be using debt quite sensibly; and that gets the nod from us. While debt comes with risk, when used wisely, it can also generate a higher return on equity. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – Hextar Global Berhad has 3 warning signs we think you should be aware.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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 any of the stocks mentioned.
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