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.' 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. We can see that Kwan Yong Holdings Limited (HKG:9998) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kwan Yong Holdings

What Is Kwan Yong Holdings's Debt?

As you can see below, Kwan Yong Holdings had S$2.61m of debt at December 2022, down from S$7.61m a year prior. However, its balance sheet shows it holds S$25.0m in cash, so it actually has S$22.4m net cash.

How Healthy Is Kwan Yong Holdings' Balance Sheet?

The latest balance sheet data shows that Kwan Yong Holdings had liabilities of S$44.8m due within a year, and liabilities of S$2.76m falling due after that. On the other hand, it had cash of S$25.0m and S$31.9m worth of receivables due within a year. So it actually has S$9.45m more liquid assets than total liabilities.

This excess liquidity is a great indication that Kwan Yong 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. Succinctly put, Kwan Yong Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Kwan Yong Holdings turned things around in the last 12 months, delivering and EBIT of S$137k. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kwan Yong Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Kwan Yong Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Kwan Yong Holdings has S$22.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of S$4.8m, being 3,501% of its EBIT. So is Kwan Yong 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. To that end, you should be aware of the 2 warning signs we've spotted with Kwan Yong Holdings .

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. 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.