These 4 Measures Indicate That Naim Holdings Berhad (KLSE:NAIM) Is Using Debt Safely

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 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 note that Naim Holdings Berhad (KLSE:NAIM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

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 RM92.1m of debt in March 2025, down from RM186.5m, one year before. However, it does have RM370.3m in cash offsetting this, leading to net cash of RM278.2m.

How Strong Is Naim Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Naim Holdings Berhad had liabilities of RM301.2m due within a year, and liabilities of RM40.7m falling due after that. Offsetting this, it had RM370.3m in cash and RM107.9m in receivables that were due within 12 months. So it actually has RM136.3m more liquid assets than total liabilities.

This luscious liquidity implies that Naim Holdings Berhad's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Naim Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Naim Holdings Berhad

Although Naim Holdings Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM206m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Naim Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Naim Holdings Berhad generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Naim Holdings Berhad has net cash of RM278.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM182m, being 88% of its EBIT. So we don't think Naim Holdings Berhad's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Naim Holdings Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.