Is KNT Holdings (HKG:1025) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, KNT Holdings Limited (HKG:1025) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for KNT Holdings

What Is KNT Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that KNT Holdings had HK$24.8m of debt in March 2022, down from HK$35.3m, one year before. But it also has HK$58.4m in cash to offset that, meaning it has HK$33.6m net cash.

How Strong Is KNT Holdings' Balance Sheet?

According to the last reported balance sheet, KNT Holdings had liabilities of HK$35.6m due within 12 months, and liabilities of HK$5.94m due beyond 12 months. Offsetting this, it had HK$58.4m in cash and HK$14.3m in receivables that were due within 12 months. So it can boast HK$31.2m more liquid assets than total liabilities.

This surplus suggests that KNT Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, KNT Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is KNT 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.

Over 12 months, KNT Holdings reported revenue of HK$80m, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is KNT Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that KNT Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$12m of cash and made a loss of HK$25m. With only HK$33.6m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, KNT Holdings may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For example KNT Holdings has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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.