We Think Wong's Kong King International (Holdings) (HKG:532) Can Manage Its Debt With Ease

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. We note that Wong's Kong King International (Holdings) Limited (HKG:532) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Wong's Kong King International (Holdings)

What Is Wong's Kong King International (Holdings)'s Net Debt?

As you can see below, Wong's Kong King International (Holdings) had HK$377.0m of debt at December 2020, down from HK$657.6m a year prior. But it also has HK$703.5m in cash to offset that, meaning it has HK$326.5m net cash.

How Strong Is Wong's Kong King International (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wong's Kong King International (Holdings) had liabilities of HK$1.46b due within 12 months and liabilities of HK$25.2m due beyond that. On the other hand, it had cash of HK$703.5m and HK$1.36b worth of receivables due within a year. So it actually has HK$574.7m more liquid assets than total liabilities.

This luscious liquidity implies that Wong's Kong King International (Holdings)'s balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Wong's Kong King International (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Wong's Kong King International (Holdings) has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Wong's Kong King International (Holdings) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Wong's Kong King International (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. Looking at the most recent three years, Wong's Kong King International (Holdings) recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Wong's Kong King International (Holdings) has HK$326.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 21% over the last year. So is Wong's Kong King International (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 - Wong's Kong King International (Holdings) has 3 warning signs we think you should be aware of.

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. 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.
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