Is Kunlun Tech (SZSE:300418) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Kunlun Tech Co., Ltd. (SZSE:300418) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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

What Is Kunlun Tech's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Kunlun Tech had debt of CN¥1.18b, up from CN¥646.2m in one year. But it also has CN¥2.34b in cash to offset that, meaning it has CN¥1.16b net cash.

A Look At Kunlun Tech's Liabilities

According to the last reported balance sheet, Kunlun Tech had liabilities of CN¥2.67b due within 12 months, and liabilities of CN¥491.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.34b as well as receivables valued at CN¥683.4m due within 12 months. So it has liabilities totalling CN¥143.1m more than its cash and near-term receivables, combined.

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 while it's hard to imagine that the CN¥45.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Kunlun Tech also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kunlun Tech can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Kunlun Tech saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Kunlun Tech?

While Kunlun Tech lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥303m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 - Kunlun Tech has 2 warning signs we think 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.