These 4 Measures Indicate That Kein Hing International Berhad (KLSE:KEINHIN) Is Using Debt Safely

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. Importantly, Kein Hing International Berhad (KLSE:KEINHIN) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Net Debt?

The image below, which you can click on for greater detail, shows that Kein Hing International Berhad had debt of RM39.8m at the end of July 2022, a reduction from RM44.8m over a year. But it also has RM47.0m in cash to offset that, meaning it has RM7.23m 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 RM76.7m due within 12 months and liabilities of RM22.8m due beyond that. On the other hand, it had cash of RM47.0m and RM57.0m worth of receivables due within a year. So it actually has RM4.54m 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!

Better yet, Kein Hing International Berhad grew its EBIT by 116% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. Over the most recent three years, Kein Hing International Berhad recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 RM7.23m, as well as more liquid assets than liabilities. And we liked the look of last year's 116% year-on-year EBIT growth. So we don't think Kein Hing International Berhad's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Kein Hing International Berhad you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.