Is Kingkey Financial International (Holdings) (HKG:1468) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Kingkey Financial International (Holdings) Limited (HKG:1468) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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?

As you can see below, at the end of September 2020, Kingkey Financial International (Holdings) had HK$206.8m of debt, up from HK$108.8m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$62.6m, its net debt is less, at about HK$144.1m.

A Look At Kingkey Financial International (Holdings)'s Liabilities

We can see from the most recent balance sheet that Kingkey Financial International (Holdings) had liabilities of HK$241.4m falling due within a year, and liabilities of HK$61.3m due beyond that. On the other hand, it had cash of HK$62.6m and HK$311.8m worth of receivables due within a year. So it can boast 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kingkey Financial International (Holdings)'s earnings that will influence how the balance sheet holds up in the future. 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. To be specific the EBIT loss came in at HK$59m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. To that end, you should learn about the 3 warning signs we've spotted with Kingkey Financial International (Holdings) (including 2 which are a bit unpleasant) .

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.

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This article by Simply Wall St is general in nature. 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.
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