Is Keck Seng Investments (Hong Kong) (HKG:184) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Keck Seng Investments (Hong Kong) Limited (HKG:184) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Keck Seng Investments (Hong Kong)

What Is Keck Seng Investments (Hong Kong)'s Net Debt?

The image below, which you can click on for greater detail, shows that Keck Seng Investments (Hong Kong) had debt of HK$1.60b at the end of June 2021, a reduction from HK$1.84b over a year. However, because it has a cash reserve of HK$1.21b, its net debt is less, at about HK$386.7m.

A Look At Keck Seng Investments (Hong Kong)'s Liabilities

The latest balance sheet data shows that Keck Seng Investments (Hong Kong) had liabilities of HK$692.8m due within a year, and liabilities of HK$1.31b falling due after that. On the other hand, it had cash of HK$1.21b and HK$91.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$701.1m.

This is a mountain of leverage relative to its market capitalization of HK$1.09b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Keck Seng Investments (Hong Kong)'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.

Over 12 months, Keck Seng Investments (Hong Kong) made a loss at the EBIT level, and saw its revenue drop to HK$473m, which is a fall of 68%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Keck Seng Investments (Hong Kong)'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 HK$280m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$167m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Keck Seng Investments (Hong Kong) is showing 3 warning signs in our investment analysis , and 2 of those are a bit concerning...

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.

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.

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