Is Xin Hwa Holdings Berhad (KLSE:XINHWA) Weighed On By Its Debt Load?

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.' 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. We can see that Xin Hwa Holdings Berhad (KLSE:XINHWA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Xin Hwa Holdings Berhad

What Is Xin Hwa Holdings Berhad's Debt?

As you can see below, Xin Hwa Holdings Berhad had RM105.0m of debt at September 2022, down from RM139.2m a year prior. On the flip side, it has RM22.0m in cash leading to net debt of about RM83.1m.

How Healthy Is Xin Hwa Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Xin Hwa Holdings Berhad had liabilities of RM55.0m due within 12 months, and liabilities of RM122.0m due beyond 12 months. Offsetting these obligations, it had cash of RM22.0m as well as receivables valued at RM37.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM117.6m.

The deficiency here weighs heavily on the RM74.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Xin Hwa Holdings Berhad would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Xin Hwa Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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 Xin Hwa Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to RM120m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Xin Hwa Holdings Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost RM3.5m at the EBIT level. 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. Not least because it burned through RM12m in negative free cash flow over the last year. That means it's on the risky side of things. 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. To that end, you should learn about the 4 warning signs we've spotted with Xin Hwa Holdings Berhad (including 2 which are significant) .

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.