Kamdar Group (M) Berhad (KLSE:KAMDAR) Has Debt But No Earnings; Should You Worry?

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.' 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 note that Kamdar Group (M) Berhad (KLSE:KAMDAR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kamdar Group (M) Berhad

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

As you can see below, Kamdar Group (M) Berhad had RM49.7m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM11.1m in cash offsetting this, leading to net debt of about RM38.6m.

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

We can see from the most recent balance sheet that Kamdar Group (M) Berhad had liabilities of RM22.5m falling due within a year, and liabilities of RM39.0m due beyond that. Offsetting this, it had RM11.1m in cash and RM6.50m in receivables that were due within 12 months. So it has liabilities totalling RM43.9m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's RM31.7m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 9.2%, to RM68m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Kamdar Group (M) Berhad produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at RM2.8m. 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. For example, we would not want to see a repeat of last year's loss of RM5.2m. And until that time we think this is a 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. We've identified 2 warning signs with Kamdar Group (M) Berhad , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.