Does Kam Hing International Holdings (HKG:2307) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Kam Hing International Holdings Limited (HKG:2307) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kam Hing International Holdings

What Is Kam Hing International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Kam Hing International Holdings had debt of HK$1.54b at the end of December 2020, a reduction from HK$1.91b over a year. However, it does have HK$804.1m in cash offsetting this, leading to net debt of about HK$740.2m.

How Healthy Is Kam Hing International Holdings' Balance Sheet?

The latest balance sheet data shows that Kam Hing International Holdings had liabilities of HK$1.61b due within a year, and liabilities of HK$1.01b falling due after that. Offsetting these obligations, it had cash of HK$804.1m as well as receivables valued at HK$839.0m due within 12 months. So it has liabilities totalling HK$976.9m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$348.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Kam Hing International 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 you can't view debt in total isolation; since Kam Hing International Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Kam Hing International Holdings had a loss before interest and tax, and actually shrunk its revenue by 12%, to HK$3.8b. That's not what we would hope to see.

Caveat Emptor

While Kam Hing International 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. Indeed, it lost HK$2.0m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$37m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Kam Hing International Holdings is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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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