Here's Why KYM Holdings Bhd (KLSE:KYM) Can Afford Some Debt

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.' 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, KYM Holdings Bhd (KLSE:KYM) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

View our latest analysis for KYM Holdings Bhd

What Is KYM Holdings Bhd's Debt?

As you can see below, KYM Holdings Bhd had RM17.4m of debt at July 2021, down from RM25.5m a year prior. However, because it has a cash reserve of RM5.70m, its net debt is less, at about RM11.7m.

How Healthy Is KYM Holdings Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KYM Holdings Bhd had liabilities of RM37.3m due within 12 months and liabilities of RM30.0m due beyond that. Offsetting these obligations, it had cash of RM5.70m as well as receivables valued at RM18.2m due within 12 months. So its liabilities total RM43.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM53.2m. 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 KYM Holdings Bhd 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.

In the last year KYM Holdings Bhd had a loss before interest and tax, and actually shrunk its revenue by 11%, to RM71m. That's not what we would hope to see.

Caveat Emptor

Not only did KYM Holdings Bhd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM308k at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of RM1.5m into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for KYM Holdings Bhd you should be aware of, and 1 of them shouldn't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.