Is Kim Hin Industry Berhad (KLSE:KIMHIN) weighed down by its 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 may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Kim Hin Industry Berhad (KLSE: KIMHIN) uses debt in his business. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Kim Hin Industry Berhad
What is Kim Hin Industry Berhad’s net debt?
As you can see below, at the end of March 2022, Kim Hin Industry Berhad had a debt of RM22.9 million, compared to RM22.0 million a year ago. Click on the image for more details. However, his balance sheet shows that he holds RM46.3 million in cash, so he actually has net cash of RM23.4 million.
A look at the responsibilities of Kim Hin Industry Berhad
According to the latest published balance sheet, Kim Hin Industry Berhad had liabilities of RM107.8 million due within 12 months and liabilities of RM46.8 million due beyond 12 months. On the other hand, it had liquid assets of RM46.3 million and RM67.3 million of receivables due within the year. Thus, its liabilities total RM41.0 million more than the combination of its cash and short-term receivables.
While that may sound like a lot, it’s not that bad since Kim Hin Industry Berhad has a market capitalization of RM105.2 million, so it could likely bolster its balance sheet by raising capital if needed. But we definitely want to keep our eyes peeled for indications that its debt is too risky. Despite its notable liabilities, Kim Hin Industry Berhad has a net cash position, so it’s fair to say that it doesn’t have a lot of debt! The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Kim Hin Industry Berhad 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.
Over 12 months, Kim Hin Industry Berhad recorded a loss in EBIT and saw its revenue drop to RM339 million, a decline of 4.4%. We would much rather see growth.
So how risky is Kim Hin Industry Berhad?
We have no doubt that loss-making companies are, in general, more risky than profitable companies. And the fact is that over the past twelve months, Kim Hin Industry Berhad has been losing money in earnings before interest and taxes (EBIT). And during the same period, it recorded a negative free cash outflow of RM23 million and recorded a book loss of RM39 million. With just RM23.4m on the balance sheet, it looks like he will soon have to raise capital again. Overall, we would say the stock is a bit risky and we are generally very cautious until we see positive free cash flow. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, Kim Hin Industry Berhad has 3 warning signs (and 2 that make us uncomfortable) that we think you should know about.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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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.