Chuan Huat Resources Berhad (KLSE:CHUAN) Use Of Debt Could Be Considered Risky

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Chuan Huat Resources Berhad (KLSE:CHUAN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Chuan Huat Resources Berhad's Debt?

The image below, which you can click on for greater detail, shows that Chuan Huat Resources Berhad had debt of RM246.8m at the end of September 2025, a reduction from RM262.4m over a year. However, it also had RM25.0m in cash, and so its net debt is RM221.8m.

How Healthy Is Chuan Huat Resources Berhad's Balance Sheet?

We can see from the most recent balance sheet that Chuan Huat Resources Berhad had liabilities of RM258.0m falling due within a year, and liabilities of RM49.6m due beyond that. Offsetting these obligations, it had cash of RM25.0m as well as receivables valued at RM189.6m due within 12 months. So it has liabilities totalling RM93.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM35.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Chuan Huat Resources Berhad would likely require a major re-capitalisation if it had to pay its creditors today.

Check out our latest analysis for Chuan Huat Resources Berhad

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Weak interest cover of 0.35 times and a disturbingly high net debt to EBITDA ratio of 27.1 hit our confidence in Chuan Huat Resources Berhad like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Worse, Chuan Huat Resources Berhad's EBIT was down 32% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Chuan Huat Resources Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Chuan Huat Resources Berhad recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

To be frank both Chuan Huat Resources Berhad's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And even its net debt to EBITDA fails to inspire much confidence. It looks to us like Chuan Huat Resources Berhad carries a significant balance sheet burden. If you harvest honey without a bee suit, you risk getting stung, so we'd probably stay away from this particular stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Chuan Huat Resources Berhad , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.