Does Kim Hin Industry Berhad (KLSE:KIMHIN) Have A Healthy 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 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 can see that Kim Hin Industry Berhad (KLSE:KIMHIN) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kim Hin Industry Berhad

What Is Kim Hin Industry Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kim Hin Industry Berhad had RM22.9m of debt in September 2020, down from RM24.5m, one year before. However, it does have RM90.8m in cash offsetting this, leading to net cash of RM67.9m.

How Healthy Is Kim Hin Industry Berhad's Balance Sheet?

According to the last reported balance sheet, Kim Hin Industry Berhad had liabilities of RM121.8m due within 12 months, and liabilities of RM37.7m due beyond 12 months. Offsetting this, it had RM90.8m in cash and RM78.2m in receivables that were due within 12 months. So it actually has RM9.52m more liquid assets than total liabilities.

This short term liquidity is a sign that Kim Hin Industry Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kim Hin Industry Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kim Hin Industry 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.

In the last year Kim Hin Industry Berhad had a loss before interest and tax, and actually shrunk its revenue by 10%, to RM339m. That's not what we would hope to see.

So How Risky Is Kim Hin Industry Berhad?

While Kim Hin Industry Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM50m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 instance, we've identified 3 warning signs for Kim Hin Industry Berhad (1 is significant) you should be aware of.

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.

When trading Kim Hin Industry Berhad or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.