Does Lien Hoe Corporation Berhad (KLSE:LIENHOE) Have A Healthy Balance Sheet?

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.' 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 can see that Lien Hoe Corporation Berhad (KLSE:LIENHOE) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Lien Hoe Corporation Berhad

What Is Lien Hoe Corporation Berhad's Debt?

As you can see below, at the end of September 2021, Lien Hoe Corporation Berhad had RM54.3m of debt, up from RM51.1m a year ago. Click the image for more detail. However, because it has a cash reserve of RM5.89m, its net debt is less, at about RM48.4m.

How Healthy Is Lien Hoe Corporation Berhad's Balance Sheet?

We can see from the most recent balance sheet that Lien Hoe Corporation Berhad had liabilities of RM60.8m falling due within a year, and liabilities of RM94.6m due beyond that. Offsetting these obligations, it had cash of RM5.89m as well as receivables valued at RM2.00m due within 12 months. So it has liabilities totalling RM147.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of RM126.3m, we think shareholders really should watch Lien Hoe Corporation Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Lien Hoe Corporation 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.

Over 12 months, Lien Hoe Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM7.8m, which is a fall of 52%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Lien Hoe Corporation Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM17m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of RM20m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 instance, we've identified 2 warning signs for Lien Hoe Corporation Berhad that you should be aware of.

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.