Kingboard Laminates Holdings (HKG:1888) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Kingboard Laminates Holdings Limited (HKG:1888) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kingboard Laminates Holdings

What Is Kingboard Laminates Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Kingboard Laminates Holdings had debt of HK$3.32b at the end of June 2022, a reduction from HK$4.67b over a year. But it also has HK$4.58b in cash to offset that, meaning it has HK$1.27b net cash.

How Strong Is Kingboard Laminates Holdings' Balance Sheet?

The latest balance sheet data shows that Kingboard Laminates Holdings had liabilities of HK$10.5b due within a year, and liabilities of HK$873.1m falling due after that. On the other hand, it had cash of HK$4.58b and HK$8.35b worth of receivables due within a year. So it can boast HK$1.58b more liquid assets than total liabilities.

This short term liquidity is a sign that Kingboard Laminates Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Kingboard Laminates Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Kingboard Laminates Holdings grew its EBIT by 15% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kingboard Laminates Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, Kingboard Laminates Holdings recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Kingboard Laminates Holdings has HK$1.27b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 15% over the last year. So is Kingboard Laminates Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Kingboard Laminates Holdings has 2 warning signs (and 1 which can't be ignored) we think 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. 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.