Is Lien Hoe Corporation Berhad (KLSE:LIENHOE) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Lien Hoe Corporation Berhad (KLSE:LIENHOE) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 RM30.5m of debt at September 2024, down from RM34.6m a year prior. However, because it has a cash reserve of RM1.59m, its net debt is less, at about RM28.9m.

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

The latest balance sheet data shows that Lien Hoe Corporation Berhad had liabilities of RM19.9m due within a year, and liabilities of RM70.0m falling due after that. Offsetting these obligations, it had cash of RM1.59m as well as receivables valued at RM1.18m due within 12 months. So it has liabilities totalling RM87.1m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM91.4m, so it does suggest shareholders should keep an eye on Lien Hoe Corporation Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 reported revenue of RM29m, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Lien Hoe Corporation Berhad had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM7.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM9.5m. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Lien Hoe Corporation Berhad you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.