Is Kim Hin Industry Berhad (KLSE:KIMHIN) Weighed On By Its Debt Load?

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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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?

As you can see below, at the end of March 2022, Kim Hin Industry Berhad had RM22.9m of debt, up from RM22.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM46.3m in cash, so it actually has RM23.4m net cash.

A Look At Kim Hin Industry Berhad's Liabilities

According to the last reported balance sheet, Kim Hin Industry Berhad had liabilities of RM107.8m due within 12 months, and liabilities of RM46.8m due beyond 12 months. On the other hand, it had cash of RM46.3m and RM67.3m worth of receivables due within a year. So its liabilities total RM41.0m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Kim Hin Industry Berhad has a market capitalization of RM105.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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! 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.

Over 12 months, Kim Hin Industry Berhad made a loss at the EBIT level, and saw its revenue drop to RM339m, which is a fall of 4.4%. We would much prefer see growth.

So How Risky Is Kim Hin Industry Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Kim Hin Industry Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM23m and booked a RM39m accounting loss. With only RM23.4m 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. However, not all investment risk resides within the balance sheet - far from it. For example Kim Hin Industry Berhad has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

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.