Here's Why Kinergy (HKG:3302) Has A Meaningful Debt Burden

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Kinergy Corporation Ltd. (HKG:3302) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Kinergy

How Much Debt Does Kinergy Carry?

You can click the graphic below for the historical numbers, but it shows that Kinergy had S$16.5m of debt in December 2022, down from S$19.8m, one year before. However, its balance sheet shows it holds S$20.6m in cash, so it actually has S$4.10m net cash.

How Strong Is Kinergy's Balance Sheet?

According to the last reported balance sheet, Kinergy had liabilities of S$36.6m due within 12 months, and liabilities of S$10.0m due beyond 12 months. Offsetting these obligations, it had cash of S$20.6m as well as receivables valued at S$15.6m due within 12 months. So its liabilities total S$10.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Kinergy is worth S$35.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Kinergy boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Kinergy's load is not too heavy, because its EBIT was down 72% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kinergy 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 two years, Kinergy burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although Kinergy's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of S$4.10m. Despite the cash, we do find Kinergy's EBIT growth rate concerning, so we're not particularly comfortable with the stock. 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, we've discovered 5 warning signs for Kinergy that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.