Does Kingkey Financial International (Holdings) (HKG:1468) Have A Healthy Balance Sheet?

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. Importantly, Kingkey Financial International (Holdings) Limited (HKG:1468) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kingkey Financial International (Holdings)

What Is Kingkey Financial International (Holdings)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Kingkey Financial International (Holdings) had HK$206.8m of debt, an increase on HK$108.8m, over one year. On the flip side, it has HK$62.6m in cash leading to net debt of about HK$144.1m.

How Strong Is Kingkey Financial International (Holdings)'s Balance Sheet?

The latest balance sheet data shows that Kingkey Financial International (Holdings) had liabilities of HK$241.4m due within a year, and liabilities of HK$61.3m falling due after that. Offsetting these obligations, it had cash of HK$62.6m as well as receivables valued at HK$311.8m due within 12 months. So it actually has HK$71.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Kingkey Financial International (Holdings) could probably pay off its debt with ease, as its balance sheet is far from stretched. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kingkey Financial International (Holdings) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Kingkey Financial International (Holdings) wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to HK$140m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Kingkey Financial International (Holdings) produced an earnings before interest and tax (EBIT) loss. Indeed, it lost HK$59m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Kingkey Financial International (Holdings) you should know about.

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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