Kein Hing International Berhad (KLSE:KEINHIN) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Kein Hing International Berhad (KLSE:KEINHIN) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kein Hing International Berhad

What Is Kein Hing International Berhad's Net Debt?

As you can see below, Kein Hing International Berhad had RM41.5m of debt at January 2021, down from RM43.7m a year prior. But it also has RM41.8m in cash to offset that, meaning it has RM227.0k net cash.

How Healthy 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 RM67.0m due within 12 months and liabilities of RM25.3m due beyond that. Offsetting this, it had RM41.8m in cash and RM53.4m in receivables that were due within 12 months. So it actually has RM2.83m more liquid assets than total liabilities.

This surplus suggests that Kein Hing International Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kein Hing International Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Kein Hing International Berhad grew its EBIT by 68% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kein Hing International 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. 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 RM227.0k, as well as more liquid assets than liabilities. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in RM6.3m. So we don't think Kein Hing International Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Kein Hing International Berhad (of which 1 is concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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