Does Ni Hsin Group Berhad (KLSE:NIHSIN) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Ni Hsin Group Berhad (KLSE:NIHSIN) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ni Hsin Group Berhad

What Is Ni Hsin Group Berhad's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Ni Hsin Group Berhad had debt of RM9.04m, up from RM3.47m in one year. But on the other hand it also has RM31.9m in cash, leading to a RM22.9m net cash position.

A Look At Ni Hsin Group Berhad's Liabilities

The latest balance sheet data shows that Ni Hsin Group Berhad had liabilities of RM7.15m due within a year, and liabilities of RM9.36m falling due after that. On the other hand, it had cash of RM31.9m and RM6.29m worth of receivables due within a year. So it actually has RM21.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Ni Hsin Group Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Ni Hsin Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Ni Hsin Group Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM4.9m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Ni Hsin Group 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ni Hsin Group 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. During the last year, Ni Hsin Group Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Ni Hsin Group Berhad has net cash of RM22.9m, as well as more liquid assets than liabilities. So we are not troubled with Ni Hsin Group Berhad's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Ni Hsin Group Berhad .

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.
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