Rock star Growth Puts KPM Holding (HKG:8027) In A Position To Use Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, KPM Holding Limited (HKG:8027) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KPM Holding

What Is KPM Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that KPM Holding had S$2.61m of debt in December 2021, down from S$2.97m, one year before. However, its balance sheet shows it holds S$3.62m in cash, so it actually has S$1.01m net cash.

How Healthy Is KPM Holding's Balance Sheet?

The latest balance sheet data shows that KPM Holding had liabilities of S$1.94m due within a year, and liabilities of S$2.29m falling due after that. Offsetting this, it had S$3.62m in cash and S$7.08m in receivables that were due within 12 months. So it actually has S$6.47m more liquid assets than total liabilities.

This surplus liquidity suggests that KPM Holding's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that KPM Holding has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since KPM Holding 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.

In the last year KPM Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 190%, to S$19m. So there's no doubt that shareholders are cheering for growth

So How Risky Is KPM Holding?

Although KPM Holding had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of S$246k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 190% is a good sign. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that KPM Holding is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

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.