Is Naim Holdings Berhad (KLSE:NAIM) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Naim Holdings Berhad (KLSE:NAIM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Naim Holdings Berhad

How Much Debt Does Naim Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Naim Holdings Berhad had RM224.1m of debt in March 2023, down from RM258.9m, one year before. But on the other hand it also has RM245.5m in cash, leading to a RM21.4m net cash position.

How Healthy Is Naim Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Naim Holdings Berhad had liabilities of RM407.4m falling due within a year, and liabilities of RM102.9m due beyond that. Offsetting these obligations, it had cash of RM245.5m as well as receivables valued at RM140.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM124.0m.

Naim Holdings Berhad has a market capitalization of RM282.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Naim Holdings 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 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.

In the last year Naim Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 23%, to RM338m. 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 RM9.7m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Be aware that Naim Holdings Berhad is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.