King's Flair International (Holdings) (HKG:6822) Seems To Use Debt Quite Sensibly

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.' 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, King's Flair International (Holdings) Limited (HKG:6822) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for King's Flair International (Holdings)

What Is King's Flair International (Holdings)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 King's Flair International (Holdings) had HK$133.8m of debt, an increase on HK$97.7m, over one year. But it also has HK$268.4m in cash to offset that, meaning it has HK$134.6m net cash.

How Strong Is King's Flair International (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that King's Flair International (Holdings) had liabilities of HK$213.9m due within 12 months and liabilities of HK$29.5m due beyond that. On the other hand, it had cash of HK$268.4m and HK$127.8m worth of receivables due within a year. So it can boast HK$152.9m more liquid assets than total liabilities.

This surplus liquidity suggests that King's Flair International (Holdings)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, King's Flair International (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that King's Flair International (Holdings)'s load is not too heavy, because its EBIT was down 59% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is King's Flair 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. King's Flair International (Holdings) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, King's Flair International (Holdings) recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case King's Flair International (Holdings) has HK$134.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$26m, being 70% of its EBIT. So we don't think King's Flair International (Holdings)'s use of debt 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. To that end, you should learn about the 4 warning signs we've spotted with King's Flair International (Holdings) (including 1 which shouldn't be ignored) .

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.