Does King Stone Energy Group (HKG:663) 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. As with many other companies King Stone Energy Group Limited (HKG:663) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for King Stone Energy Group

What Is King Stone Energy Group's Debt?

As you can see below, at the end of June 2022, King Stone Energy Group had HK$361.1m of debt, up from HK$318.7m a year ago. Click the image for more detail. However, it also had HK$80.9m in cash, and so its net debt is HK$280.3m.

How Strong Is King Stone Energy Group's Balance Sheet?

According to the last reported balance sheet, King Stone Energy Group had liabilities of HK$417.5m due within 12 months, and liabilities of HK$9.50m due beyond 12 months. Offsetting these obligations, it had cash of HK$80.9m as well as receivables valued at HK$133.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$212.3m.

While this might seem like a lot, it is not so bad since King Stone Energy Group has a market capitalization of HK$362.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 King Stone Energy Group 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.

Over 12 months, King Stone Energy Group reported revenue of HK$119m, which is a gain of 106%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate King Stone Energy Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at HK$730k. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$24m of cash over the last year. 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. We've identified 3 warning signs with King Stone Energy Group (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.