Kam Hing International Holdings (HKG:2307) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Kam Hing International Holdings Limited (HKG:2307) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kam Hing International Holdings

What Is Kam Hing International Holdings's Debt?

The image below, which you can click on for greater detail, shows that Kam Hing International Holdings had debt of HK$1.46b at the end of December 2022, a reduction from HK$1.82b over a year. However, it also had HK$1.08b in cash, and so its net debt is HK$387.2m.

How Strong Is Kam Hing International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Kam Hing International Holdings had liabilities of HK$1.15b falling due within a year, and liabilities of HK$1.00b due beyond that. Offsetting these obligations, it had cash of HK$1.08b as well as receivables valued at HK$564.5m due within 12 months. So it has liabilities totalling HK$516.7m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$265.3m company, like a colossus towering over mere mortals. 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 it is Kam Hing International 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 Kam Hing International Holdings had a loss before interest and tax, and actually shrunk its revenue by 6.5%, to HK$4.1b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Kam Hing International Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$80m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of HK$58m. And until that time we think this is a risky stock. 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. We've identified 2 warning signs with Kam Hing International Holdings (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.