Is Kidsland International Holdings (HKG:2122) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Kidsland International Holdings Limited (HKG:2122) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kidsland International Holdings

How Much Debt Does Kidsland International Holdings Carry?

The image below, which you can click on for greater detail, shows that Kidsland International Holdings had debt of CN¥33.0m at the end of June 2021, a reduction from CN¥36.3m over a year. However, its balance sheet shows it holds CN¥91.4m in cash, so it actually has CN¥58.4m net cash.

How Strong Is Kidsland International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Kidsland International Holdings had liabilities of CN¥354.1m falling due within a year, and liabilities of CN¥69.2m due beyond that. Offsetting this, it had CN¥91.4m in cash and CN¥189.4m in receivables that were due within 12 months. So its liabilities total CN¥142.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥165.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Kidsland International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kidsland International 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.

Over 12 months, Kidsland International Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Kidsland International Holdings?

While Kidsland International Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥17m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Case in point: We've spotted 2 warning signs for Kidsland International Holdings you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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