Health Check: How Prudently Does Kin Shing Holdings (HKG:1630) Use 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.' 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. We note that Kin Shing Holdings Limited (HKG:1630) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kin Shing Holdings

How Much Debt Does Kin Shing Holdings Carry?

As you can see below, Kin Shing Holdings had HK$142.6m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$189.4m in cash offsetting this, leading to net cash of HK$46.8m.

How Healthy Is Kin Shing Holdings' Balance Sheet?

The latest balance sheet data shows that Kin Shing Holdings had liabilities of HK$223.9m due within a year, and liabilities of HK$466.0k falling due after that. Offsetting this, it had HK$189.4m in cash and HK$164.6m in receivables that were due within 12 months. So it actually has HK$129.6m more liquid assets than total liabilities.

This surplus strongly suggests that Kin Shing Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Kin Shing Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kin Shing 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, Kin Shing Holdings reported revenue of HK$524m, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Kin Shing Holdings?

Although Kin Shing Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$2.6m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Given it also grew revenue by 21% over the last year, we think there's a good chance the company is on track. That growth could mean this is one stock well worth watching. 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. To that end, you should learn about the 5 warning signs we've spotted with Kin Shing Holdings (including 2 which make us uncomfortable) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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