Does Kim Hin Industry Berhad (KLSE:KIMHIN) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Kim Hin Industry Berhad (KLSE:KIMHIN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. 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?

The image below, which you can click on for greater detail, shows that Kim Hin Industry Berhad had debt of RM20.7m at the end of March 2023, a reduction from RM22.9m over a year. But on the other hand it also has RM35.0m in cash, leading to a RM14.4m net cash position.

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

We can see from the most recent balance sheet that Kim Hin Industry Berhad had liabilities of RM95.8m falling due within a year, and liabilities of RM36.9m due beyond that. Offsetting this, it had RM35.0m in cash and RM55.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM42.1m.

This deficit is considerable relative to its market capitalization of RM63.1m, so it does suggest shareholders should keep an eye on Kim Hin Industry Berhad's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Kim Hin Industry Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Kim Hin Industry Berhad made a loss at the EBIT level, and saw its revenue drop to RM327m, which is a fall of 3.8%. That's not what we would hope to see.

So How Risky Is Kim Hin Industry Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Kim Hin Industry Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM5.2m and booked a RM42m accounting loss. With only RM14.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Kim Hin Industry Berhad (at least 1 which is concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.