Keck Seng Investments (Hong Kong) (HKG:184) Is Making Moderate Use Of Debt

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.' 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. Importantly, Keck Seng Investments (Hong Kong) Limited (HKG:184) does carry 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Keck Seng Investments (Hong Kong)

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

As you can see below, Keck Seng Investments (Hong Kong) had HK$1.60b of debt at December 2020, down from HK$1.89b a year prior. However, it also had HK$1.28b in cash, and so its net debt is HK$321.6m.

How Strong Is Keck Seng Investments (Hong Kong)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Keck Seng Investments (Hong Kong) had liabilities of HK$1.07b due within 12 months and liabilities of HK$947.1m due beyond that. Offsetting these obligations, it had cash of HK$1.28b as well as receivables valued at HK$116.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$626.8m.

This deficit isn't so bad because Keck Seng Investments (Hong Kong) is worth HK$1.11b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Keck Seng Investments (Hong Kong) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Keck Seng Investments (Hong Kong) had a loss before interest and tax, and actually shrunk its revenue by 66%, to HK$666m. 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$274m 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. Another cause for caution is that is bled HK$282m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Keck Seng Investments (Hong Kong) you should know about.

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. 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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