We Think KNK Holdings (HKG:8039) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that KNK Holdings Limited (HKG:8039) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 KNK Holdings

What Is KNK Holdings's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 KNK Holdings had debt of HK$11.8m, up from HK$5.00m in one year. However, because it has a cash reserve of HK$8.76m, its net debt is less, at about HK$3.01m.

How Strong Is KNK Holdings's Balance Sheet?

According to the last reported balance sheet, KNK Holdings had liabilities of HK$17.7m due within 12 months, and liabilities of HK$208.0k due beyond 12 months. On the other hand, it had cash of HK$8.76m and HK$6.01m worth of receivables due within a year. So its liabilities total HK$3.09m more than the combination of its cash and short-term receivables.

Having regard to KNK Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$267.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, KNK Holdings has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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 KNK 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 KNK Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 9.6%, to HK$33m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months KNK Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$25m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$11m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with KNK Holdings (including 2 which is are concerning) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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