Naim Holdings Berhad (KLSE:NAIM) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Naim Holdings Berhad (KLSE:NAIM) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Naim Holdings Berhad

What Is Naim Holdings Berhad's Debt?

As you can see below, Naim Holdings Berhad had RM313.8m of debt at December 2020, down from RM483.5m a year prior. However, it does have RM360.2m in cash offsetting this, leading to net cash of RM46.4m.

How Strong Is Naim Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Naim Holdings Berhad had liabilities of RM576.2m falling due within a year, and liabilities of RM118.8m due beyond that. On the other hand, it had cash of RM360.2m and RM174.2m worth of receivables due within a year. So it has liabilities totalling RM160.6m more than its cash and near-term receivables, combined.

Naim Holdings Berhad has a market capitalization of RM368.0m, 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. 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.

Better yet, Naim Holdings Berhad grew its EBIT by 549% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Naim Holdings 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Naim Holdings 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 three years, Naim Holdings Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Naim Holdings Berhad does have more liabilities than liquid assets, it also has net cash of RM46.4m. The cherry on top was that in converted 234% of that EBIT to free cash flow, bringing in RM346m. So is Naim Holdings Berhad's debt a risk? It doesn't seem so to us. 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 - Naim Holdings Berhad has 3 warning signs we think you should be aware of.

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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