Is Kinergy (HKG:3302) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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. 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.

See our latest analysis for Kinergy

What Is Kinergy's Net Debt?

As you can see below, Kinergy had S$17.3m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have S$8.99m in cash offsetting this, leading to net debt of about S$8.27m.

How Healthy Is Kinergy's Balance Sheet?

According to the last reported balance sheet, Kinergy had liabilities of S$44.2m due within 12 months, and liabilities of S$7.87m due beyond 12 months. Offsetting these obligations, it had cash of S$8.99m as well as receivables valued at S$28.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$14.3m.

This deficit is considerable relative to its market capitalization of S$22.2m, so it does suggest shareholders should keep an eye on Kinergy's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Kinergy wasn't profitable at an EBIT level, but managed to grow its revenue by 2.6%, to S$100m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Kinergy produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable S$10m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled S$5.5m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Kinergy you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.