Stock Analysis

Does KWG Group Holdings (HKG:1813) Have A Healthy Balance Sheet?

SEHK:1813
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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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that KWG Group Holdings Limited (HKG:1813) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KWG Group Holdings

What Is KWG Group Holdings's Debt?

As you can see below, KWG Group Holdings had CN¥73.3b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥1.72b in cash, and so its net debt is CN¥71.6b.

debt-equity-history-analysis
SEHK:1813 Debt to Equity History March 28th 2024

How Strong Is KWG Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that KWG Group Holdings had liabilities of CN¥114.7b falling due within a year, and liabilities of CN¥34.7b due beyond that. On the other hand, it had cash of CN¥1.72b and CN¥1.53b worth of receivables due within a year. So it has liabilities totalling CN¥146.1b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥931.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, KWG Group Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine KWG Group Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, KWG Group Holdings reported revenue of CN¥16b, which is a gain of 18%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months KWG Group Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥7.9b. 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 CN¥19b 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. To that end, you should learn about the 2 warning signs we've spotted with KWG Group Holdings (including 1 which shouldn't be ignored) .

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.

Valuation is complex, but we're here to simplify it.

Discover if KWG Group Holdings might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.