Is Kin Yat Holdings (HKG:638) 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, Kin Yat Holdings Limited (HKG:638) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kin Yat Holdings

What Is Kin Yat Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Kin Yat Holdings had debt of HK$312.5m at the end of September 2023, a reduction from HK$489.4m over a year. However, because it has a cash reserve of HK$195.5m, its net debt is less, at about HK$117.0m.

A Look At Kin Yat Holdings' Liabilities

According to the last reported balance sheet, Kin Yat Holdings had liabilities of HK$786.4m due within 12 months, and liabilities of HK$121.9m due beyond 12 months. Offsetting these obligations, it had cash of HK$195.5m as well as receivables valued at HK$253.4m due within 12 months. So it has liabilities totalling HK$459.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$210.7m 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, Kin Yat 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 Kin Yat 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 Kin Yat Holdings had a loss before interest and tax, and actually shrunk its revenue by 35%, to HK$1.1b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Kin Yat Holdings'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$34m. 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. It's fair to say the loss of HK$102m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Kin Yat Holdings you should be aware of, and 1 of them can't be ignored.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.