Is KWG Group Holdings (HKG:1813) Using Debt Sensibly?

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.' 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, KWG Group Holdings Limited (HKG:1813) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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?

The chart below, which you can click on for greater detail, shows that KWG Group Holdings had CN¥75.7b in debt in June 2023; about the same as the year before. However, it does have CN¥5.17b in cash offsetting this, leading to net debt of about CN¥70.5b.

How Strong Is KWG Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KWG Group Holdings had liabilities of CN¥106.5b due within 12 months and liabilities of CN¥51.2b due beyond that. Offsetting these obligations, it had cash of CN¥5.17b as well as receivables valued at CN¥1.98b due within 12 months. So it has liabilities totalling CN¥150.5b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥2.33b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, KWG Group Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if KWG Group Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year KWG Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 36%, to CN¥12b. To be frank that doesn't bode well.

Caveat Emptor

Not only did KWG Group Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥9.6b. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥20b in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for KWG Group Holdings (2 are a bit concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.