Lien Hoe Corporation Berhad (KLSE:LIENHOE) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Lien Hoe Corporation Berhad (KLSE:LIENHOE) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Lien Hoe Corporation Berhad

What Is Lien Hoe Corporation Berhad's Debt?

The image below, which you can click on for greater detail, shows that Lien Hoe Corporation Berhad had debt of RM31.6m at the end of June 2024, a reduction from RM35.6m over a year. However, it does have RM1.69m in cash offsetting this, leading to net debt of about RM29.9m.

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 RM20.2m falling due within a year, and liabilities of RM71.1m due beyond that. Offsetting these obligations, it had cash of RM1.69m as well as receivables valued at RM1.97m due within 12 months. So its liabilities total RM87.6m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's RM84.8m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lien Hoe Corporation 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.

Over 12 months, Lien Hoe Corporation Berhad reported revenue of RM28m, which is a gain of 20%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Lien Hoe Corporation Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM9.2m. 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 RM12m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Lien Hoe Corporation Berhad .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.