Lien Hoe Corporation Berhad (KLSE:LIENHOE) Is Carrying A Fair Bit Of Debt

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.' 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 note that Lien Hoe Corporation Berhad (KLSE:LIENHOE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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

How Much Debt Does Lien Hoe Corporation Berhad Carry?

As you can see below, Lien Hoe Corporation Berhad had RM36.3m of debt at September 2022, down from RM54.3m a year prior. However, because it has a cash reserve of RM12.1m, its net debt is less, at about RM24.2m.

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

According to the last reported balance sheet, Lien Hoe Corporation Berhad had liabilities of RM16.5m due within 12 months, and liabilities of RM78.8m due beyond 12 months. Offsetting these obligations, it had cash of RM12.1m as well as receivables valued at RM3.32m due within 12 months. So its liabilities total RM79.9m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM114.7m, 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 you can't view debt in total isolation; since Lien Hoe Corporation Berhad will need earnings to service that debt. 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 RM18m, which is a gain of 135%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Lien Hoe Corporation Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable RM104m at the EBIT level. 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 RM21m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Lien Hoe Corporation Berhad (2 are significant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.