Does Kiu Hung International Holdings (HKG:381) 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. Importantly, Kiu Hung International Holdings Limited (HKG:381) does carry debt. But should shareholders be worried about its use of debt?

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. 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, 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.

View our latest analysis for Kiu Hung International Holdings

How Much Debt Does Kiu Hung International Holdings Carry?

As you can see below, at the end of December 2021, Kiu Hung International Holdings had HK$477.1m of debt, up from HK$378.1m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$201.1m, its net debt is less, at about HK$276.0m.

How Strong Is Kiu Hung International Holdings' Balance Sheet?

According to the last reported balance sheet, Kiu Hung International Holdings had liabilities of HK$595.7m due within 12 months, and liabilities of HK$156.4m due beyond 12 months. Offsetting this, it had HK$201.1m in cash and HK$34.1m in receivables that were due within 12 months. So its liabilities total HK$516.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$51.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Kiu Hung International Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kiu Hung 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 Kiu Hung International Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 59%, to HK$324m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Kiu Hung International Holdings still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$2.4m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$49m in the last year. So we think buying this stock is 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. For example Kiu Hung International Holdings has 4 warning signs (and 3 which are significant) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.