Is Kamdar Group (M) Berhad (KLSE:KAMDAR) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Kamdar Group (M) Berhad (KLSE:KAMDAR) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kamdar Group (M) Berhad

What Is Kamdar Group (M) Berhad's Net Debt?

As you can see below, Kamdar Group (M) Berhad had RM51.3m of debt at June 2022, down from RM66.7m a year prior. On the flip side, it has RM8.98m in cash leading to net debt of about RM42.3m.

A Look At Kamdar Group (M) Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Kamdar Group (M) Berhad had liabilities of RM22.7m due within 12 months and liabilities of RM42.5m due beyond that. On the other hand, it had cash of RM8.98m and RM17.6m worth of receivables due within a year. So it has liabilities totalling RM38.6m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's RM37.6m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kamdar Group (M) 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.

In the last year Kamdar Group (M) Berhad had a loss before interest and tax, and actually shrunk its revenue by 14%, to RM63m. We would much prefer see growth.

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. Its EBIT loss was a whopping RM4.0m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of RM5.1m and free cash flow of RM12m. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Kamdar Group (M) Berhad is showing 2 warning signs in our investment analysis , you should know about...

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.