Is Lien Hoe Corporation Berhad (KLSE:LIENHOE) 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.' 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, Lien Hoe Corporation Berhad (KLSE:LIENHOE) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its 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, Lien Hoe Corporation Berhad had RM40.1m of debt at December 2021, down from RM52.7m a year prior. However, it does have RM7.45m in cash offsetting this, leading to net debt of about RM32.6m.

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

Zooming in on the latest balance sheet data, we can see that Lien Hoe Corporation Berhad had liabilities of RM34.8m due within 12 months and liabilities of RM78.8m due beyond that. On the other hand, it had cash of RM7.45m and RM40.4m worth of receivables due within a year. So it has liabilities totalling RM65.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Lien Hoe Corporation Berhad has a market capitalization of RM109.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Lien Hoe Corporation Berhad's earnings that will influence how the balance sheet holds up in the future. 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 RM9.3m, which is a fall of 18%. That's not what we would hope to see.

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 RM89m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM25m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Lien Hoe Corporation Berhad (of which 2 are a bit concerning!) you should know about.

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.