Is Kontafarma China Holdings (HKG:1312) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Kontafarma China Holdings Limited (HKG:1312) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Kontafarma China Holdings's Debt?

As you can see below, at the end of June 2025, Kontafarma China Holdings had HK$82.1m of debt, up from HK$43.3m a year ago. Click the image for more detail. On the flip side, it has HK$78.3m in cash leading to net debt of about HK$3.75m.

A Look At Kontafarma China Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Kontafarma China Holdings had liabilities of HK$415.6m due within 12 months and liabilities of HK$116.5m due beyond that. Offsetting these obligations, it had cash of HK$78.3m as well as receivables valued at HK$249.0m due within 12 months. So its liabilities total HK$204.8m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of HK$167.7m, we think shareholders really should watch Kontafarma China Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Kontafarma China Holdings will need earnings to service that debt. 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.

View our latest analysis for Kontafarma China Holdings

In the last year Kontafarma China Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 6.5%, to HK$892m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Kontafarma China Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$75m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of HK$363m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Kontafarma China Holdings (2 are a bit unpleasant) you should be aware of.

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.