Is Kader Holdings (HKG:180) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Kader Holdings Company Limited (HKG:180) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kader Holdings

What Is Kader Holdings's Net Debt?

As you can see below, at the end of December 2022, Kader Holdings had HK$521.3m of debt, up from HK$375.8m a year ago. Click the image for more detail. However, it also had HK$122.5m in cash, and so its net debt is HK$398.9m.

How Healthy Is Kader Holdings' Balance Sheet?

The latest balance sheet data shows that Kader Holdings had liabilities of HK$705.2m due within a year, and liabilities of HK$70.0m falling due after that. Offsetting these obligations, it had cash of HK$122.5m as well as receivables valued at HK$121.2m due within 12 months. So it has liabilities totalling HK$531.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of HK$380.2m, we think shareholders really should watch Kader Holdings's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kader Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Kader Holdings made a loss at the EBIT level, and saw its revenue drop to HK$355m, which is a fall of 12%. That's not what we would hope to see.

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$8.9m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of HK$55m over the last twelve months. That means it's on the risky side of things. 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 Kader Holdings is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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. 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.