Health Check: How Prudently Does Naim Holdings Berhad (KLSE:NAIM) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Naim Holdings Berhad (KLSE:NAIM) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Naim Holdings Berhad

What Is Naim Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Naim Holdings Berhad had RM216.6m of debt in June 2023, down from RM248.7m, one year before. However, it does have RM234.2m in cash offsetting this, leading to net cash of RM17.7m.

How Strong Is Naim Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Naim Holdings Berhad had liabilities of RM423.6m due within 12 months, and liabilities of RM97.6m due beyond 12 months. On the other hand, it had cash of RM234.2m and RM165.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM121.8m.

Naim Holdings Berhad has a market capitalization of RM383.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Naim Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Naim Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Naim Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM344m, which is a fall of 25%. That makes us nervous, to say the least.

So How Risky Is Naim Holdings Berhad?

While Naim Holdings Berhad lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of RM16m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 instance, we've identified 2 warning signs for Naim Holdings Berhad that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.