We Think Wong's Kong King International (Holdings) (HKG:532) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Wong's Kong King International (Holdings) Limited (HKG:532) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

The image below, which you can click on for greater detail, shows that Wong's Kong King International (Holdings) had debt of HK$702.1m at the end of June 2023, a reduction from HK$939.9m over a year. But it also has HK$780.5m in cash to offset that, meaning it has HK$78.3m net cash.

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

The latest balance sheet data shows that Wong's Kong King International (Holdings) had liabilities of HK$1.62b due within a year, and liabilities of HK$52.0m falling due after that. On the other hand, it had cash of HK$780.5m and HK$1.12b worth of receivables due within a year. So it can boast HK$221.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Wong's Kong King International (Holdings)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Wong's Kong King International (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Wong's Kong King International (Holdings)'s EBIT fell a jaw-dropping 89% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is Wong's Kong King International (Holdings)'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.

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. Over the most recent three years, Wong's Kong King International (Holdings) recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wong's Kong King International (Holdings) has HK$78.3m in net cash and a decent-looking balance sheet. So we are not troubled with Wong's Kong King International (Holdings)'s debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Wong's Kong King International (Holdings) has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.