Is Kunlun Tech (SZSE:300418) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Kunlun Tech Co., Ltd. (SZSE:300418) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kunlun Tech

How Much Debt Does Kunlun Tech Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Kunlun Tech had debt of CN¥1.33b, up from CN¥662.2m in one year. But on the other hand it also has CN¥2.40b in cash, leading to a CN¥1.07b net cash position.

How Strong Is Kunlun Tech's Balance Sheet?

We can see from the most recent balance sheet that Kunlun Tech had liabilities of CN¥3.01b falling due within a year, and liabilities of CN¥661.6m due beyond that. Offsetting these obligations, it had cash of CN¥2.40b as well as receivables valued at CN¥948.3m due within 12 months. So its liabilities total CN¥325.5m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Kunlun Tech's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥36.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Kunlun Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Kunlun Tech's load is not too heavy, because its EBIT was down 80% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kunlun Tech'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kunlun Tech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Kunlun Tech actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Kunlun Tech's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.07b. And it impressed us with free cash flow of CN¥288m, being 124% of its EBIT. So we don't have any problem with Kunlun Tech's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 2 warning signs for Kunlun Tech you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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