Is Kingboard Laminates Holdings (HKG:1888) A Risky Investment?

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. As with many other companies Kingboard Laminates Holdings Limited (HKG:1888) makes use of debt. But is this debt a concern to shareholders?

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. 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. 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.

View our latest analysis for Kingboard Laminates Holdings

How Much Debt Does Kingboard Laminates Holdings Carry?

The image below, which you can click on for greater detail, shows that Kingboard Laminates Holdings had debt of HK$1.15b at the end of December 2020, a reduction from HK$2.95b over a year. But on the other hand it also has HK$5.84b in cash, leading to a HK$4.68b net cash position.

A Look At Kingboard Laminates Holdings' Liabilities

We can see from the most recent balance sheet that Kingboard Laminates Holdings had liabilities of HK$11.7b falling due within a year, and liabilities of HK$310.6m due beyond that. Offsetting these obligations, it had cash of HK$5.84b as well as receivables valued at HK$8.41b due within 12 months. So it actually has HK$2.26b more liquid assets than total liabilities.

This surplus suggests that Kingboard Laminates Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kingboard Laminates Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Kingboard Laminates Holdings has increased its EBIT by 9.0% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Kingboard Laminates Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Kingboard Laminates 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. During the last three years, Kingboard Laminates Holdings produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Kingboard Laminates Holdings has HK$4.68b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 9.0% in the last twelve months. So we don't think Kingboard Laminates Holdings's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Kingboard Laminates Holdings you should know about.

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. 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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