Kasen International Holdings (HKG:496) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Kasen International Holdings Limited (HKG:496) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Kasen International Holdings

What Is Kasen International Holdings's Net Debt?

As you can see below, Kasen International Holdings had CN¥782.9m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥451.7m in cash leading to net debt of about CN¥331.2m.

How Strong Is Kasen International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Kasen International Holdings had liabilities of CN¥1.42b falling due within a year, and liabilities of CN¥579.7m due beyond that. On the other hand, it had cash of CN¥451.7m and CN¥72.0m worth of receivables due within a year. So its liabilities total CN¥1.48b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥388.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Kasen International Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kasen 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 Kasen International Holdings had a loss before interest and tax, and actually shrunk its revenue by 42%, to CN¥754m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Kasen International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥50m 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. However, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥7.5m and the profit of CN¥66m. So there is arguably potential that the company is going to turn things around. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Kasen International Holdings , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.