Would Kin Pang Holdings (HKG:1722) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Kin Pang Holdings Limited (HKG:1722) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Pang Holdings

How Much Debt Does Kin Pang Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Kin Pang Holdings had MO$130.2m of debt, an increase on MO$28.3m, over one year. However, because it has a cash reserve of MO$10.3m, its net debt is less, at about MO$119.9m.

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$364.2m due within 12 months and liabilities of MO$3.22m due beyond that. Offsetting these obligations, it had cash of MO$10.3m as well as receivables valued at MO$443.8m due within 12 months. So it can boast MO$86.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that Kin Pang Holdings' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 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.

In the last year Kin Pang Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to MO$1.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.

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. Its EBIT loss was a whopping MO$17m. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Kin Pang Holdings (including 3 which are potentially serious) .

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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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.