Is Kam Hing International Holdings (HKG:2307) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Kam Hing International Holdings Limited (HKG:2307) does carry debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Kam Hing International Holdings

What Is Kam Hing International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kam Hing International Holdings had HK$1.26b of debt in December 2023, down from HK$1.46b, one year before. However, because it has a cash reserve of HK$916.3m, its net debt is less, at about HK$345.2m.

A Look At Kam Hing International Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Kam Hing International Holdings had liabilities of HK$1.73b due within 12 months and liabilities of HK$396.2m due beyond that. On the other hand, it had cash of HK$916.3m and HK$498.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$715.2m.

The deficiency here weighs heavily on the HK$169.6m 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. At the end of the day, Kam Hing International Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kam Hing International Holdings will need earnings to service that debt. 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 Kam Hing International Holdings had a loss before interest and tax, and actually shrunk its revenue by 12%, to HK$3.6b. We would much prefer see growth.

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. Its EBIT loss was a whopping HK$143m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost HK$133m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Kam Hing International Holdings (of which 1 is concerning!) you should know about.

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.