We Think King Stone Energy Group (HKG:663) Has A Fair Chunk Of 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. As with many other companies King Stone Energy Group Limited (HKG:663) makes use of debt. But is this debt a concern to shareholders?

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 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, 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.

Check out our latest analysis for King Stone Energy Group

How Much Debt Does King Stone Energy Group Carry?

As you can see below, at the end of December 2020, King Stone Energy Group had HK$336.0m of debt, up from HK$255.7m a year ago. Click the image for more detail. However, it does have HK$57.4m in cash offsetting this, leading to net debt of about HK$278.6m.

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

The latest balance sheet data shows that King Stone Energy Group had liabilities of HK$392.8m due within a year, and liabilities of HK$3.15m falling due after that. Offsetting this, it had HK$57.4m in cash and HK$114.9m in receivables that were due within 12 months. So its liabilities total HK$223.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because King Stone Energy Group is worth HK$1.03b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is King Stone Energy 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.

In the last year King Stone Energy Group wasn't profitable at an EBIT level, but managed to grow its revenue by 184%, to HK$51m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though King Stone Energy Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost HK$25m 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. For example, we would not want to see a repeat of last year's loss of HK$269m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with King Stone Energy Group .

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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