Here's Why Kin Pang Holdings (HKG:1722) Can Manage Its Debt Responsibly

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.' 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 can see that Kin Pang Holdings Limited (HKG:1722) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

View our latest analysis for Kin Pang Holdings

What Is Kin Pang Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Kin Pang Holdings had MO$28.3m of debt, an increase on MO$15.8m, over one year. But on the other hand it also has MO$30.1m in cash, leading to a MO$1.78m net cash position.

How Healthy Is Kin Pang Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kin Pang Holdings had liabilities of MO$218.3m due within 12 months and liabilities of MO$25.2m due beyond that. Offsetting this, it had MO$30.1m in cash and MO$309.4m in receivables that were due within 12 months. So it actually has MO$96.0m more liquid assets than total liabilities.

This surplus strongly suggests that Kin Pang Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. 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.

On the other hand, Kin Pang Holdings's EBIT dived 11%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Kin Pang Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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, you should keep in mind that Kin Pang Holdings has net cash of MO$1.78m, as well as more liquid assets than liabilities. So we don't have any problem with Kin Pang Holdings's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Kin Pang Holdings (of which 1 can't be ignored!) you should know about.

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. 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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