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

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 KFM Kingdom Holdings Limited (HKG:3816) makes use of debt. But should shareholders be worried about its use of debt?

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 KFM Kingdom Holdings

How Much Debt Does KFM Kingdom Holdings Carry?

The image below, which you can click on for greater detail, shows that KFM Kingdom Holdings had debt of HK$36.0m at the end of September 2021, a reduction from HK$166.0m over a year. But it also has HK$295.5m in cash to offset that, meaning it has HK$259.5m net cash.

How Healthy Is KFM Kingdom Holdings' Balance Sheet?

The latest balance sheet data shows that KFM Kingdom Holdings had liabilities of HK$416.1m due within a year, and liabilities of HK$2.97m falling due after that. Offsetting this, it had HK$295.5m in cash and HK$122.2m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that KFM Kingdom Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$139.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, KFM Kingdom Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, KFM Kingdom Holdings's EBIT launched higher than Elon Musk, gaining a whopping 216% on last year. There's no doubt that we learn most about debt from the balance sheet. But it is KFM Kingdom Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, KFM Kingdom Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about KFM Kingdom Holdings's liabilities, but we can be reassured by the fact it has has net cash of HK$259.5m. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in -HK$23m. 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. We've identified 1 warning sign with KFM Kingdom 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.