Is Kader Holdings (HKG:180) Weighed On By Its Debt Load?

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. We note that Kader Holdings Company Limited (HKG:180) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Kader Holdings

What Is Kader Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Kader Holdings had HK$653.4m of debt, an increase on HK$605.7m, over one year. On the flip side, it has HK$54.2m in cash leading to net debt of about HK$599.1m.

How Strong Is Kader Holdings' Balance Sheet?

According to the last reported balance sheet, Kader Holdings had liabilities of HK$786.1m due within 12 months, and liabilities of HK$83.0m due beyond 12 months. On the other hand, it had cash of HK$54.2m and HK$133.4m worth of receivables due within a year. So it has liabilities totalling HK$681.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$304.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Kader Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Kader Holdings's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Kader Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$2.8m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of HK$148m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Kader Holdings (1 is significant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.