Health Check: How Prudently Does Ni Hsin Group Berhad (KLSE:NIHSIN) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Ni Hsin Group Berhad (KLSE:NIHSIN) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ni Hsin Group Berhad

How Much Debt Does Ni Hsin Group Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Ni Hsin Group Berhad had RM7.93m of debt, an increase on RM6.73m, over one year. However, its balance sheet shows it holds RM22.3m in cash, so it actually has RM14.3m net cash.

How Strong Is Ni Hsin Group Berhad's Balance Sheet?

The latest balance sheet data shows that Ni Hsin Group Berhad had liabilities of RM6.63m due within a year, and liabilities of RM11.2m falling due after that. On the other hand, it had cash of RM22.3m and RM2.26m worth of receivables due within a year. So it can boast RM6.71m more liquid assets than total liabilities.

This surplus suggests that Ni Hsin Group Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ni Hsin Group 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 it is Ni Hsin Group Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Ni Hsin Group Berhad reported revenue of RM35m, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Ni Hsin Group Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Ni Hsin Group Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM7.3m of cash and made a loss of RM5.0m. Given it only has net cash of RM14.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Ni Hsin Group Berhad (1 shouldn't be ignored) 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.