Does Kinetic Development Group (HKG:1277) Have A Healthy Balance Sheet?

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 note that Kinetic Development Group Limited (HKG:1277) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kinetic Development Group

What Is Kinetic Development Group's Net Debt?

As you can see below, at the end of June 2022, Kinetic Development Group had CN¥1.23b of debt, up from CN¥280.6m a year ago. Click the image for more detail. However, it does have CN¥1.65b in cash offsetting this, leading to net cash of CN¥415.0m.

A Look At Kinetic Development Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Kinetic Development Group had liabilities of CN¥2.47b due within 12 months and liabilities of CN¥1.55b due beyond that. Offsetting these obligations, it had cash of CN¥1.65b as well as receivables valued at CN¥148.5m due within 12 months. So it has liabilities totalling CN¥2.22b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Kinetic Development Group is worth CN¥4.67b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Kinetic Development Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Kinetic Development Group grew its EBIT by 109% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kinetic Development Group'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kinetic Development Group 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. During the last three years, Kinetic Development Group generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Kinetic Development Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥415.0m. And it impressed us with free cash flow of CN¥3.1b, being 83% of its EBIT. So is Kinetic Development Group's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Kinetic Development Group that you should be aware of before investing here.

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.