Is Kamdar Group (M) Berhad (KLSE:KAMDAR) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Kamdar Group (M) Berhad (KLSE:KAMDAR) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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, 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 Kamdar Group (M) Berhad

How Much Debt Does Kamdar Group (M) Berhad Carry?

The chart below, which you can click on for greater detail, shows that Kamdar Group (M) Berhad had RM81.6m in debt in December 2020; about the same as the year before. However, it does have RM6.92m in cash offsetting this, leading to net debt of about RM74.6m.

How Healthy Is Kamdar Group (M) Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kamdar Group (M) Berhad had liabilities of RM49.0m due within 12 months and liabilities of RM53.3m due beyond that. On the other hand, it had cash of RM6.92m and RM6.69m worth of receivables due within a year. So its liabilities total RM88.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM50.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Kamdar Group (M) Berhad would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kamdar Group (M) Berhad will need earnings to service that debt. 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.

In the last year Kamdar Group (M) Berhad had a loss before interest and tax, and actually shrunk its revenue by 34%, to RM75m. That makes us nervous, to say the least.

Caveat Emptor

While Kamdar Group (M) Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM4.2m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of RM6.5m 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. Case in point: We've spotted 2 warning signs for Kamdar Group (M) Berhad you should be aware of, and 1 of them makes us a bit uncomfortable.

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. 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.
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