Is KWG Living Group Holdings (HKG:3913) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that KWG Living Group Holdings Limited (HKG:3913) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for KWG Living Group Holdings

How Much Debt Does KWG Living Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that KWG Living Group Holdings had CN¥612.3m of debt in June 2024, down from CN¥642.2m, one year before. However, its balance sheet shows it holds CN¥1.27b in cash, so it actually has CN¥656.2m net cash.

A Look At KWG Living Group Holdings' Liabilities

According to the last reported balance sheet, KWG Living Group Holdings had liabilities of CN¥2.70b due within 12 months, and liabilities of CN¥577.5m due beyond 12 months. On the other hand, it had cash of CN¥1.27b and CN¥2.85b worth of receivables due within a year. So it can boast CN¥845.8m more liquid assets than total liabilities.

This surplus liquidity suggests that KWG Living Group Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that KWG Living Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Although KWG Living Group Holdings made a loss at the EBIT level, last year, it was also good to see that it generated CN¥369m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since KWG Living Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While KWG Living Group Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, KWG Living Group Holdings saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case KWG Living Group Holdings has CN¥656.2m in net cash and a strong balance sheet. So we are not troubled with KWG Living Group Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for KWG Living Group Holdings you should be aware of, and 1 of them is a bit concerning.

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.