Would Kiddieland International (HKG:3830) Be Better Off With Less Debt?

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. As with many other companies Kiddieland International Limited (HKG:3830) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kiddieland International

What Is Kiddieland International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of April 2022 Kiddieland International had HK$44.6m of debt, an increase on HK$11.4m, over one year. However, it also had HK$10.3m in cash, and so its net debt is HK$34.3m.

How Healthy Is Kiddieland International's Balance Sheet?

According to the last reported balance sheet, Kiddieland International had liabilities of HK$80.7m due within 12 months, and liabilities of HK$6.78m due beyond 12 months. Offsetting these obligations, it had cash of HK$10.3m as well as receivables valued at HK$21.2m due within 12 months. So its liabilities total HK$56.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of HK$82.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kiddieland International'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 Kiddieland International had a loss before interest and tax, and actually shrunk its revenue by 19%, to HK$244m. That's not what we would hope to see.

Caveat Emptor

Not only did Kiddieland International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$32m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$66m into a profit. So to be blunt we do think it is risky. 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. Case in point: We've spotted 2 warning signs for Kiddieland International you should be aware of.

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.