Is Kinergy (HKG:3302) Using Debt In A Risky Way?

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. Importantly, Kinergy Corporation Ltd. (HKG:3302) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 image below, which you can click on for greater detail, shows that Kinergy had debt of S$17.4m at the end of June 2023, a reduction from S$32.8m over a year. However, it does have S$20.2m in cash offsetting this, leading to net cash of S$2.86m.

How Healthy Is Kinergy's Balance Sheet?

According to the last reported balance sheet, Kinergy had liabilities of S$32.5m due within 12 months, and liabilities of S$9.41m due beyond 12 months. Offsetting these obligations, it had cash of S$20.2m as well as receivables valued at S$18.0m due within 12 months. So its liabilities total S$3.62m more than the combination of its cash and short-term receivables.

Since publicly traded Kinergy shares are worth a total of S$45.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kinergy 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, Kinergy made a loss at the EBIT level, and saw its revenue drop to S$97m, which is a fall of 40%. To be frank that doesn't bode well.

So How Risky Is Kinergy?

While Kinergy lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of S$177k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 be aware of the 5 warning signs we've spotted with Kinergy .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.