We Think Ni Hsin Group Berhad (KLSE:NIHSIN) Can Stay On Top Of Its Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?

Why Does Debt Bring Risk?

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

Check out our latest analysis for Ni Hsin Group Berhad

What Is Ni Hsin Group Berhad's Debt?

As you can see below, at the end of September 2021, Ni Hsin Group Berhad had RM7.41m of debt, up from RM2.91m a year ago. Click the image for more detail. But on the other hand it also has RM30.6m in cash, leading to a RM23.2m net cash position.

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

We can see from the most recent balance sheet that Ni Hsin Group Berhad had liabilities of RM5.20m falling due within a year, and liabilities of RM9.36m due beyond that. On the other hand, it had cash of RM30.6m and RM6.65m worth of receivables due within a year. So it can boast RM22.7m 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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.

We also note that Ni Hsin Group Berhad improved its EBIT from a last year's loss to a positive RM649k. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ni Hsin Group Berhad will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ni Hsin Group 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. Over the last year, Ni Hsin Group Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Ni Hsin Group Berhad has RM23.2m in net cash and a decent-looking balance sheet. So we don't have any problem with Ni Hsin Group Berhad's use of debt. 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 example, we've discovered 2 warning signs for Ni Hsin Group Berhad (1 is a bit unpleasant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.