Does Keen Ocean International Holding (HKG:8070) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Keen Ocean International Holding Limited (HKG:8070) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Keen Ocean International Holding

What Is Keen Ocean International Holding's Net Debt?

As you can see below, Keen Ocean International Holding had HK$29.9m of debt at June 2024, down from HK$46.6m a year prior. But it also has HK$88.2m in cash to offset that, meaning it has HK$58.3m net cash.

A Look At Keen Ocean International Holding's Liabilities

According to the balance sheet data, Keen Ocean International Holding had liabilities of HK$125.8m due within 12 months, but no longer term liabilities. Offsetting this, it had HK$88.2m in cash and HK$50.0m in receivables that were due within 12 months. So it actually has HK$12.4m more liquid assets than total liabilities.

This surplus suggests that Keen Ocean International Holding is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Keen Ocean International Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Keen Ocean International Holding has seen its EBIT plunge 16% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is Keen Ocean International Holding'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. Keen Ocean International Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Keen Ocean International Holding actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Keen Ocean International Holding has net cash of HK$58.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$61m, being 168% of its EBIT. So is Keen Ocean International Holding'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 - Keen Ocean International Holding has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.