Kim Hin Industry Berhad (KLSE: KIMHIN) Using Too Much Debt?

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We can see that Kim Hin Industry Berhad (KLSE: KIMHIN) uses debt in his business. But should shareholders be concerned about its use of debt?

What risk does debt entail?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies 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 flow and debt together.

See our latest review for Kim Hin Industry Berhad

How much debt does Kim Hin Industry Berhad carry?

As you can see below, at the end of June 2021, Kim Hin Industry Berhad had RM26.6million in debt, up from RM22.3million a year ago. Click on the image for more details. However, his balance sheet shows that he holds RM61.9million in cash, so he actually has net cash of RM35.3million.

KLSE: KIMHIN History of debt to equity September 29, 2021

A look at the responsibilities of Kim Hin Industry Berhad

The latest balance sheet data shows that Kim Hin Industry Berhad had debts of RM 104.2 million due within one year, and RM 28.0 million debts due thereafter. On the other hand, he had cash of RM 61.9 million and RM 61.0 million of receivables due within one year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by RM9.27 million.

Considering that Kim Hin Industry Berhad has a market cap of RM 130.4 million, it is hard to believe that these liabilities pose a significant threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite her notable liabilities, Kim Hin Industry Berhad has a net cash flow, so it’s fair to say that she doesn’t have a heavy debt load! When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Kim Hin Industry Berhad that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.

Over the past year, Kim Hin Industry Berhad was not profitable on EBIT level, but managed to increase its turnover by 13%, to RM 378 million. We generally like to see unprofitable businesses growing faster, but each in their own way.

So how risky is Kim Hin Industry Berhad?

Statistically speaking, businesses that lose money are riskier than those that earn it. And over the past year, Kim Hin Industry Berhad has recorded a loss of earnings before interest and taxes (EBIT), frankly. And in the same period, it recorded a negative free cash outflow of RM42 million and recorded an accounting loss of RM4.1 million. With only RM 35.3 million on the balance sheet, it looks like it will soon have to raise capital again. Overall, we would say the stock is a bit risky, and we’re generally very cautious until we see positive free cash flow. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 3 warning signs for Kim Hin Industry Berhad (1 is significant!) That you should know before investing here.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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