We Think King's Flair International (Holdings) (HKG:6822) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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. We can see that King's Flair International (Holdings) Limited (HKG:6822) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

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

How Much Debt Does King's Flair International (Holdings) Carry?

As you can see below, King's Flair International (Holdings) had HK$98.4m of debt at June 2024, down from HK$133.8m a year prior. But it also has HK$136.4m in cash to offset that, meaning it has HK$38.1m net cash.

A Look At King's Flair International (Holdings)'s Liabilities

Zooming in on the latest balance sheet data, we can see that King's Flair International (Holdings) had liabilities of HK$172.1m due within 12 months and liabilities of HK$23.5m due beyond that. Offsetting this, it had HK$136.4m in cash and HK$152.5m in receivables that were due within 12 months. So it can boast HK$93.3m more liquid assets than total liabilities.

It's good to see that King's Flair International (Holdings) has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that King's Flair International (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, King's Flair International (Holdings)'s EBIT fell a jaw-dropping 58% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is King's Flair International (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While King's Flair International (Holdings) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, King's Flair International (Holdings) recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case King's Flair International (Holdings) has HK$38.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -HK$7.4m, being 88% of its EBIT. So we are not troubled with King's Flair International (Holdings)'s debt use. 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. To that end, you should learn about the 4 warning signs we've spotted with King's Flair International (Holdings) (including 2 which don't sit too well with us) .

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.