Does KFM Kingdom Holdings (HKG:3816) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies KFM Kingdom Holdings Limited (HKG:3816) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for KFM Kingdom Holdings

How Much Debt Does KFM Kingdom Holdings Carry?

As you can see below, KFM Kingdom Holdings had HK$166.0m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$243.5m in cash offsetting this, leading to net cash of HK$77.5m.

How Strong Is KFM Kingdom Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KFM Kingdom Holdings had liabilities of HK$295.6m due within 12 months and liabilities of HK$65.1m due beyond that. Offsetting these obligations, it had cash of HK$243.5m as well as receivables valued at HK$175.5m due within 12 months. So it can boast HK$58.4m more liquid assets than total liabilities.

This luscious liquidity implies that KFM Kingdom Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, KFM Kingdom Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, KFM Kingdom Holdings grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since KFM Kingdom 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While KFM Kingdom 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. Over the last three years, KFM Kingdom Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that KFM Kingdom Holdings has net cash of HK$77.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$76m, being 189% of its EBIT. So is KFM Kingdom Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that KFM Kingdom Holdings is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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