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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Xin Hwa Holdings Berhad (KLSE:XINHWA) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Xin Hwa Holdings Berhad

How Much Debt Does Xin Hwa Holdings Berhad Carry?

As you can see below, at the end of March 2024, Xin Hwa Holdings Berhad had RM116.3m of debt, up from RM106.8m a year ago. Click the image for more detail. On the flip side, it has RM12.3m in cash leading to net debt of about RM104.1m.

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

Zooming in on the latest balance sheet data, we can see that Xin Hwa Holdings Berhad had liabilities of RM77.8m due within 12 months and liabilities of RM146.0m due beyond that. Offsetting this, it had RM12.3m in cash and RM28.6m in receivables that were due within 12 months. So its liabilities total RM183.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM48.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Xin Hwa Holdings 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 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.

Over 12 months, Xin Hwa Holdings Berhad saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Xin Hwa Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable RM14m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of RM21m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Xin Hwa Holdings Berhad (2 are a bit concerning) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com