Does Kin Pang Holdings (HKG:1722) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Kin Pang Holdings Limited (HKG:1722) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kin Pang Holdings

How Much Debt Does Kin Pang Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2020 Kin Pang Holdings had debt of MO$28.2m, up from MO$2.08m in one year. But it also has MO$29.4m in cash to offset that, meaning it has MO$1.26m net cash.

A Look At Kin Pang Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Kin Pang Holdings had liabilities of MO$114.2m due within 12 months and liabilities of MO$26.3m due beyond that. On the other hand, it had cash of MO$29.4m and MO$205.0m worth of receivables due within a year. So it actually has MO$93.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Kin Pang Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Kin Pang Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Kin Pang Holdings grew its EBIT by 113% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kin Pang Holdings will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Kin Pang Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Kin Pang Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that Kin Pang Holdings has net cash of MO$1.26m and plenty of liquid assets. And it impressed us with its EBIT growth of 113% over the last year. So is Kin Pang Holdings's debt a risk? It doesn't seem so to us. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Kin Pang Holdings (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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. 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.
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