Does Kwan Yong Holdings (HKG:9998) Have A Healthy Balance Sheet?

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.' 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 Kwan Yong Holdings Limited (HKG:9998) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kwan Yong Holdings

How Much Debt Does Kwan Yong Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Kwan Yong Holdings had S$4.67m of debt in June 2021, down from S$5.37m, one year before. But on the other hand it also has S$32.7m in cash, leading to a S$28.1m net cash position.

How Strong Is Kwan Yong Holdings' Balance Sheet?

According to the last reported balance sheet, Kwan Yong Holdings had liabilities of S$45.5m due within 12 months, and liabilities of S$5.19m due beyond 12 months. Offsetting these obligations, it had cash of S$32.7m as well as receivables valued at S$26.2m due within 12 months. So it can boast S$8.24m more liquid assets than total liabilities.

This excess liquidity suggests that Kwan Yong Holdings is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Kwan Yong Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kwan Yong 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 Kwan Yong Holdings had a loss before interest and tax, and actually shrunk its revenue by 29%, to S$91m. That makes us nervous, to say the least.

So How Risky Is Kwan Yong Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Kwan Yong Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$13m of cash and made a loss of S$6.2m. Given it only has net cash of S$28.1m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 2 warning signs with Kwan Yong Holdings (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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