Kwan On Holdings (HKG:1559) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Kwan On Holdings Limited (HKG:1559) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kwan On Holdings

What Is Kwan On Holdings's Debt?

As you can see below, Kwan On Holdings had HK$180.5m of debt at September 2022, down from HK$201.4m a year prior. On the flip side, it has HK$41.6m in cash leading to net debt of about HK$138.9m.

How Strong Is Kwan On Holdings' Balance Sheet?

According to the last reported balance sheet, Kwan On Holdings had liabilities of HK$303.7m due within 12 months, and liabilities of HK$32.7m due beyond 12 months. On the other hand, it had cash of HK$41.6m and HK$369.0m worth of receivables due within a year. So it can boast HK$74.2m more liquid assets than total liabilities.

This luscious liquidity implies that Kwan On Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. There's no doubt that we learn most about debt from the balance sheet. But it is Kwan On Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Kwan On Holdings made a loss at the EBIT level, and saw its revenue drop to HK$438m, which is a fall of 22%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Kwan On Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$80m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. For example, we've discovered 4 warning signs for Kwan On Holdings (1 is significant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.