We Think Kim Hin Industry Berhad (KLSE:KIMHIN) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Kim Hin Industry Berhad (KLSE:KIMHIN) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 RM22.0m of debt in December 2020, down from RM22.9m, one year before. But it also has RM70.9m in cash to offset that, meaning it has RM48.9m net cash.

A Look At Kim Hin Industry Berhad's Liabilities

We can see from the most recent balance sheet that Kim Hin Industry Berhad had liabilities of RM109.4m falling due within a year, and liabilities of RM34.6m due beyond that. On the other hand, it had cash of RM70.9m and RM74.0m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Kim Hin Industry Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the RM136.0m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Kim Hin Industry Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Kim Hin Industry Berhad improved its EBIT from a last year's loss to a positive RM1.8m. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kim Hin Industry 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 last year, Kim Hin Industry Berhad actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Kim Hin Industry Berhad has RM48.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM36m, being 2,056% of its EBIT. So we don't have any problem with Kim Hin Industry Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Kim Hin Industry Berhad has 3 warning signs (and 1 which is significant) 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. 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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