Is Kim Hin Industry Berhad (KLSE:KIMHIN) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kim Hin Industry Berhad

How Much Debt Does Kim Hin Industry Berhad Carry?

As you can see below, at the end of June 2021, Kim Hin Industry Berhad had RM26.6m of debt, up from RM22.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM61.9m in cash, so it actually has RM35.3m net cash.

A Look At Kim Hin Industry Berhad's Liabilities

The latest balance sheet data shows that Kim Hin Industry Berhad had liabilities of RM104.2m due within a year, and liabilities of RM28.0m falling due after that. On the other hand, it had cash of RM61.9m and RM61.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM9.27m.

Given Kim Hin Industry Berhad has a market capitalization of RM130.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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! When analysing debt levels, the balance sheet is the obvious place to start. But it is Kim Hin Industry 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.

In the last year Kim Hin Industry Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to RM378m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Kim Hin Industry Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Kim Hin Industry Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM42m and booked a RM4.1m accounting loss. With only RM35.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Kim Hin Industry Berhad (1 is significant!) 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.

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.

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