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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Xin Hwa Holdings Berhad (KLSE:XINHWA) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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.
What Is Xin Hwa Holdings Berhad's Debt?
You can click the graphic below for the historical numbers, but it shows that Xin Hwa Holdings Berhad had RM102.6m of debt in June 2022, down from RM140.7m, one year before. On the flip side, it has RM28.2m in cash leading to net debt of about RM74.4m.
How Strong Is Xin Hwa Holdings Berhad's Balance Sheet?
According to the last reported balance sheet, Xin Hwa Holdings Berhad had liabilities of RM49.4m due within 12 months, and liabilities of RM125.4m due beyond 12 months. On the other hand, it had cash of RM28.2m and RM42.5m worth of receivables due within a year. So it has liabilities totalling RM104.1m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the RM56.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Xin Hwa Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Xin Hwa Holdings Berhad 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 Xin Hwa Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to RM112m. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Xin Hwa Holdings Berhad produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at RM2.2m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through RM8.2m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Xin Hwa Holdings Berhad is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...
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.
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Xin Hwa Holdings Berhad
Xin Hwa Holdings Berhad, an investment holding company, provides integrated logistics services in Malaysia, Singapore, and Indonesia.
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Slightly overvalued with imperfect balance sheet.