Kein Hing International Berhad (KLSE:KEINHIN) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Kein Hing International Berhad (KLSE:KEINHIN) does have debt on its balance sheet. 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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kein Hing International Berhad

What Is Kein Hing International Berhad's Debt?

The image below, which you can click on for greater detail, shows that Kein Hing International Berhad had debt of RM41.4m at the end of April 2022, a reduction from RM47.6m over a year. But it also has RM45.6m in cash to offset that, meaning it has RM4.29m net cash.

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

Zooming in on the latest balance sheet data, we can see that Kein Hing International Berhad had liabilities of RM70.4m due within 12 months and liabilities of RM23.9m due beyond that. Offsetting this, it had RM45.6m in cash and RM54.5m in receivables that were due within 12 months. So it actually has RM5.81m 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. Simply put, the fact that Kein Hing International Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Kein Hing International Berhad grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Kein Hing International Berhad produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 RM4.29m, as well as more liquid assets than liabilities. And we liked the look of last year's 26% year-on-year EBIT growth. So is Kein Hing International Berhad's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Kein Hing International Berhad that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.