Is KYM Holdings Bhd (KLSE:KYM) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that KYM Holdings Bhd (KLSE:KYM) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for KYM Holdings Bhd

What Is KYM Holdings Bhd's Debt?

As you can see below, at the end of July 2020, KYM Holdings Bhd had RM25.5m of debt, up from RM23.0m a year ago. Click the image for more detail. On the flip side, it has RM9.49m in cash leading to net debt of about RM16.0m.

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 RM47.1m due within 12 months and liabilities of RM35.5m due beyond that. On the other hand, it had cash of RM9.49m and RM19.8m worth of receivables due within a year. So it has liabilities totalling RM53.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM54.7m, so it does suggest shareholders should keep an eye on KYM Holdings Bhd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is KYM Holdings Bhd'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.

In the last year KYM Holdings Bhd had a loss before interest and tax, and actually shrunk its revenue by 16%, to RM80m. We would much prefer see growth.

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 RM1.9m 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. 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 RM7.0m. So in short it's a really risky stock. 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 learn about the 2 warning signs we've spotted with KYM Holdings Bhd (including 1 which is is a bit unpleasant) .

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.

If you decide to trade KYM Holdings Bhd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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