Is Kin Shing Holdings (HKG:1630) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Kin Shing Holdings Limited (HKG:1630) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kin Shing Holdings

What Is Kin Shing Holdings's Debt?

The chart below, which you can click on for greater detail, shows that Kin Shing Holdings had HK$143.8m in debt in September 2021; about the same as the year before. But on the other hand it also has HK$167.9m in cash, leading to a HK$24.1m net cash position.

A Look At Kin Shing Holdings' Liabilities

We can see from the most recent balance sheet that Kin Shing Holdings had liabilities of HK$191.4m falling due within a year, and liabilities of HK$4.00m due beyond that. Offsetting this, it had HK$167.9m in cash and HK$151.1m in receivables that were due within 12 months. So it can boast HK$123.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Kin Shing Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Kin Shing Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kin Shing Holdings will need earnings to service that debt. 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$607m, which is a gain of 45%, 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$3.9m. 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 45% 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. We've identified 4 warning signs with Kin Shing Holdings (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.