Is KBC Corporation (SHSE:688598) Using Debt In A Risky Way?

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. We can see that KBC Corporation, Ltd. (SHSE:688598) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for KBC Corporation

What Is KBC Corporation's Debt?

You can click the graphic below for the historical numbers, but it shows that KBC Corporation had CN¥316.8m of debt in September 2024, down from CN¥477.8m, one year before. However, it does have CN¥1.53b in cash offsetting this, leading to net cash of CN¥1.21b.

How Strong Is KBC Corporation's Balance Sheet?

The latest balance sheet data shows that KBC Corporation had liabilities of CN¥512.9m due within a year, and liabilities of CN¥352.9m falling due after that. Offsetting these obligations, it had cash of CN¥1.53b as well as receivables valued at CN¥613.5m due within 12 months. So it actually has CN¥1.28b more liquid assets than total liabilities.

This excess liquidity suggests that KBC Corporation is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that KBC Corporation has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine KBC Corporation's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year KBC Corporation had a loss before interest and tax, and actually shrunk its revenue by 46%, to CN¥634m. That makes us nervous, to say the least.

So How Risky Is KBC Corporation?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that KBC Corporation had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥822m and booked a CN¥255m accounting loss. With only CN¥1.21b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for KBC Corporation that 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.