Here's Why Kein Hing International Berhad (KLSE:KEINHIN) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Kein Hing International Berhad (KLSE:KEINHIN) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kein Hing International Berhad

How Much Debt Does Kein Hing International Berhad Carry?

The chart below, which you can click on for greater detail, shows that Kein Hing International Berhad had RM44.4m in debt in October 2020; about the same as the year before. However, it does have RM53.1m in cash offsetting this, leading to net cash of RM8.67m.

How Healthy Is Kein Hing International Berhad's Balance Sheet?

According to the last reported balance sheet, Kein Hing International Berhad had liabilities of RM65.1m due within 12 months, and liabilities of RM27.0m due beyond 12 months. Offsetting this, it had RM53.1m in cash and RM42.6m in receivables that were due within 12 months. So it actually has RM3.49m more liquid assets than total liabilities.

This short term liquidity is a sign that Kein Hing International Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kein Hing International Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

We saw Kein Hing International Berhad grow its EBIT by 3.5% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Kein Hing International Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kein Hing International Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Kein Hing International Berhad actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Kein Hing International Berhad has net cash of RM8.67m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM18m, being 175% of its EBIT. So is Kein Hing International Berhad's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Kein Hing International Berhad (including 1 which shouldn't be ignored) .

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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