Chin Hin Group Berhad (KLSE:CHINHIN) Seems To Be Using A Lot Of Debt

Simply Wall St
May 20, 2021
Source: Shutterstock

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Chin Hin Group Berhad (KLSE:CHINHIN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Chin Hin Group Berhad

How Much Debt Does Chin Hin Group Berhad Carry?

The image below, which you can click on for greater detail, shows that Chin Hin Group Berhad had debt of RM414.0m at the end of December 2020, a reduction from RM513.8m over a year. On the flip side, it has RM55.8m in cash leading to net debt of about RM358.3m.

KLSE:CHINHIN Debt to Equity History May 20th 2021

How Healthy Is Chin Hin Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Chin Hin Group Berhad had liabilities of RM542.5m falling due within a year, and liabilities of RM83.8m due beyond that. Offsetting these obligations, it had cash of RM55.8m as well as receivables valued at RM381.1m due within 12 months. So it has liabilities totalling RM189.4m more than its cash and near-term receivables, combined.

Of course, Chin Hin Group Berhad has a market capitalization of RM992.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). 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 0.73 times and a disturbingly high net debt to EBITDA ratio of 8.6 hit our confidence in Chin Hin Group Berhad like a one-two punch to the gut. The debt burden here is substantial. Worse, Chin Hin Group Berhad's EBIT was down 68% 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chin Hin Group Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Chin Hin Group Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Chin Hin Group Berhad's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. Having said that, its ability to handle its total liabilities isn't such a worry. We're quite clear that we consider Chin Hin Group Berhad to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. For example, we've discovered 2 warning signs for Chin Hin Group Berhad (1 doesn't sit too well with us!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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