Health Check: How Prudently Does Kinergy (HKG:3302) Use Debt?

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, Kinergy Corporation Ltd. (HKG:3302) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Kinergy

What Is Kinergy's Debt?

The chart below, which you can click on for greater detail, shows that Kinergy had S$16.0m in debt in December 2023; about the same as the year before. But it also has S$18.7m in cash to offset that, meaning it has S$2.70m net cash.

How Strong Is Kinergy's Balance Sheet?

We can see from the most recent balance sheet that Kinergy had liabilities of S$41.2m falling due within a year, and liabilities of S$8.64m due beyond that. On the other hand, it had cash of S$18.7m and S$18.2m worth of receivables due within a year. So its liabilities total S$12.9m more than the combination of its cash and short-term receivables.

Kinergy has a market capitalization of S$38.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Kinergy also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kinergy's earnings that will influence how the balance sheet holds up in the future. 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, Kinergy made a loss at the EBIT level, and saw its revenue drop to S$92m, which is a fall of 26%. To be frank that doesn't bode well.

So How Risky Is Kinergy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Kinergy had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through S$3.4m of cash and made a loss of S$2.6m. Given it only has net cash of S$2.70m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should learn about the 2 warning signs we've spotted with Kinergy (including 1 which makes us a bit uncomfortable) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com