Stock Analysis

Xin Hwa Holdings Berhad (KLSE:XINHWA) Has Debt But No Earnings; Should You Worry?

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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. As with many other companies Xin Hwa Holdings Berhad (KLSE:XINHWA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Xin Hwa Holdings Berhad

How Much Debt Does Xin Hwa Holdings Berhad Carry?

The chart below, which you can click on for greater detail, shows that Xin Hwa Holdings Berhad had RM104.2m in debt in September 2023; about the same as the year before. However, it does have RM10.5m in cash offsetting this, leading to net debt of about RM93.7m.

KLSE:XINHWA Debt to Equity History February 19th 2024

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

The latest balance sheet data shows that Xin Hwa Holdings Berhad had liabilities of RM65.2m due within a year, and liabilities of RM112.9m falling due after that. Offsetting this, it had RM10.5m in cash and RM35.4m in receivables that were due within 12 months. So its liabilities total RM132.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM63.9m 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. 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.

In the last year Xin Hwa Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 7.1%, to RM129m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Xin Hwa Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM11m at the EBIT level. 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. It's fair to say the loss of RM18m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Xin Hwa Holdings Berhad (2 are a bit unpleasant!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Valuation is complex, but we're helping make it simple.

Find out whether Xin Hwa Holdings Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.