We Think K. H. Group Holdings (HKG:1557) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that K. H. Group Holdings Limited (HKG:1557) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for K. H. Group Holdings

What Is K. H. Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 K. H. Group Holdings had debt of HK$273.9m, up from HK$190.0m in one year. However, because it has a cash reserve of HK$67.0m, its net debt is less, at about HK$207.0m.

How Strong Is K. H. Group Holdings' Balance Sheet?

According to the last reported balance sheet, K. H. Group Holdings had liabilities of HK$489.6m due within 12 months, and liabilities of HK$93.3m due beyond 12 months. On the other hand, it had cash of HK$67.0m and HK$378.6m worth of receivables due within a year. So its liabilities total HK$137.3m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of HK$180.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is K. H. Group Holdings'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.

In the last year K. H. Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 19%, to HK$752m. That's not what we would hope to see.

Caveat Emptor

While K. H. Group Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at HK$14m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of HK$18m. So in short it's a really risky stock. 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. Be aware that K. H. Group Holdings is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.