Is Road King Infrastructure (HKG:1098) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Road King Infrastructure Limited (HKG:1098) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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 Road King Infrastructure

What Is Road King Infrastructure's Net Debt?

As you can see below, Road King Infrastructure had HK$26.0b of debt at June 2023, down from HK$36.9b a year prior. However, because it has a cash reserve of HK$7.14b, its net debt is less, at about HK$18.8b.

A Look At Road King Infrastructure's Liabilities

According to the last reported balance sheet, Road King Infrastructure had liabilities of HK$28.6b due within 12 months, and liabilities of HK$22.6b due beyond 12 months. Offsetting this, it had HK$7.14b in cash and HK$4.79b in receivables that were due within 12 months. So its liabilities total HK$39.2b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$1.25b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Road King Infrastructure would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Road King Infrastructure'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.

Over 12 months, Road King Infrastructure made a loss at the EBIT level, and saw its revenue drop to HK$18b, which is a fall of 25%. To be frank that doesn't bode well.

Caveat Emptor

While Road King Infrastructure's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at HK$13m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$1.8b in the last year. So we're not very excited about owning this stock. Its too risky for us. 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 example Road King Infrastructure has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.