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

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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Xin Hwa Holdings Berhad had debt of RM113.9m, up from RM104.9m in one year. However, because it has a cash reserve of RM7.94m, its net debt is less, at about RM106.0m.

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

According to the last reported balance sheet, Xin Hwa Holdings Berhad had liabilities of RM82.7m due within 12 months, and liabilities of RM137.0m due beyond 12 months. On the other hand, it had cash of RM7.94m and RM35.8m worth of receivables due within a year. So its liabilities total RM175.9m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM44.7m 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 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. 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.

Over 12 months, Xin Hwa Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM117m, which is a fall of 7.3%. We would much prefer see growth.

Caveat Emptor

Importantly, Xin Hwa Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM12m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of RM17m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Xin Hwa Holdings Berhad (of which 2 shouldn't be ignored!) you should know about.

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.

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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.