Health Check: How Prudently Does Kontafarma China Holdings (HKG:1312) Use 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. We note that Kontafarma China Holdings Limited (HKG:1312) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kontafarma China Holdings

How Much Debt Does Kontafarma China Holdings Carry?

The image below, which you can click on for greater detail, shows that Kontafarma China Holdings had debt of HK$85.3m at the end of June 2023, a reduction from HK$200.5m over a year. However, it does have HK$170.6m in cash offsetting this, leading to net cash of HK$85.4m.

How Strong Is Kontafarma China Holdings' Balance Sheet?

The latest balance sheet data shows that Kontafarma China Holdings had liabilities of HK$378.5m due within a year, and liabilities of HK$308.3m falling due after that. Offsetting these obligations, it had cash of HK$170.6m as well as receivables valued at HK$407.9m due within 12 months. So its liabilities total HK$108.3m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of HK$178.8m, so it does suggest shareholders should keep an eye on Kontafarma China Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Kontafarma China Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kontafarma China Holdings 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, Kontafarma China Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Kontafarma China Holdings?

Although Kontafarma China Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$5.4m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Kontafarma China Holdings is showing 3 warning signs in our investment analysis , you should know about...

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.