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

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.' 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. Importantly, Ni Hsin Group Berhad (KLSE:NIHSIN) does carry debt. But the more important question is: how much risk is that debt creating?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at 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 2024 Ni Hsin Group Berhad had debt of RM9.11m, up from RM7.17m in one year. But on the other hand it also has RM12.3m in cash, leading to a RM3.23m 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 RM10.1m due within a year, and liabilities of RM11.6m falling due after that. Offsetting this, it had RM12.3m in cash and RM7.29m in receivables that were due within 12 months. So it has liabilities totalling RM2.09m more than its cash and near-term receivables, combined.

Since publicly traded Ni Hsin Group Berhad shares are worth a total of RM55.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Ni Hsin Group Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Ni Hsin Group 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.

Over 12 months, Ni Hsin Group Berhad made a loss at the EBIT level, and saw its revenue drop to RM30m, which is a fall of 5.8%. We would much prefer see growth.

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. And over the same period it saw negative free cash outflow of RM7.9m and booked a RM7.3m accounting loss. However, it has net cash of RM3.23m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 2 warning signs for Ni Hsin Group Berhad (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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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.