Does Kader Holdings (HKG:180) Have A Healthy Balance Sheet?

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, Kader Holdings Company Limited (HKG:180) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Kader Holdings

What Is Kader Holdings's Debt?

As you can see below, Kader Holdings had HK$324.4m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$108.0m in cash offsetting this, leading to net debt of about HK$216.3m.

How Strong Is Kader Holdings' Balance Sheet?

The latest balance sheet data shows that Kader Holdings had liabilities of HK$496.2m due within a year, and liabilities of HK$68.8m falling due after that. Offsetting this, it had HK$108.0m in cash and HK$150.6m in receivables that were due within 12 months. So it has liabilities totalling HK$306.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$408.8m, so it does suggest shareholders should keep an eye on Kader Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kader 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.

In the last year Kader Holdings had a loss before interest and tax, and actually shrunk its revenue by 12%, to HK$401m. We would much prefer see growth.

Caveat Emptor

While Kader Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at HK$11m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of HK$110m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Kader Holdings has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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. 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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