Kin Pang Holdings (HKG:1722) 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.' 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. As with many other companies Kin Pang Holdings Limited (HKG:1722) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kin Pang Holdings

How Much Debt Does Kin Pang Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Kin Pang Holdings had MO$89.9m of debt in June 2024, down from MO$108.5m, one year before. However, it also had MO$28.5m in cash, and so its net debt is MO$61.4m.

How Healthy Is Kin Pang Holdings' Balance Sheet?

According to the last reported balance sheet, Kin Pang Holdings had liabilities of MO$247.8m due within 12 months, and liabilities of MO$1.55m due beyond 12 months. Offsetting this, it had MO$28.5m in cash and MO$224.6m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This short term liquidity is a sign that Kin Pang Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. There's no doubt that we learn most about debt from the balance sheet. But it is Kin Pang 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 Pang Holdings reported revenue of MO$708m, which is a gain of 32%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Kin Pang Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable MO$29m at the EBIT level. 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 a profit would do more to inspire us to research the business more closely. So it seems too risky for our taste. 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 2 warning signs with Kin Pang Holdings , 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.