Is Ni Hsin Group Berhad (KLSE:NIHSIN) A Risky Investment?

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.' 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. We note that Ni Hsin Group Berhad (KLSE:NIHSIN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ni Hsin Group Berhad

What Is Ni Hsin Group Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Ni Hsin Group Berhad had RM8.87m of debt, an increase on RM8.14m, over one year. But it also has RM26.4m in cash to offset that, meaning it has RM17.5m net cash.

A Look At Ni Hsin Group Berhad's Liabilities

The latest balance sheet data shows that Ni Hsin Group Berhad had liabilities of RM7.81m due within a year, and liabilities of RM10.9m falling due after that. On the other hand, it had cash of RM26.4m and RM8.91m worth of receivables due within a year. So it can boast RM16.6m more liquid assets than total liabilities.

This excess liquidity suggests that Ni Hsin Group Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Ni Hsin Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Ni Hsin Group Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 6.2%, to RM32m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Ni Hsin Group Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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 RM8.5m and booked a RM5.7m accounting loss. Given it only has net cash of RM17.5m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 4 warning signs for Ni Hsin Group Berhad you should be aware of, and 1 of them is significant.

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.