Is Kerry Logistics Network (HKG:636) Using Too Much Debt?

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 can see that Kerry Logistics Network Limited (HKG:636) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kerry Logistics Network

How Much Debt Does Kerry Logistics Network Carry?

The chart below, which you can click on for greater detail, shows that Kerry Logistics Network had HK$8.83b in debt in December 2023; about the same as the year before. However, it does have HK$9.08b in cash offsetting this, leading to net cash of HK$249.3m.

A Look At Kerry Logistics Network's Liabilities

Zooming in on the latest balance sheet data, we can see that Kerry Logistics Network had liabilities of HK$14.7b due within 12 months and liabilities of HK$7.36b due beyond that. Offsetting these obligations, it had cash of HK$9.08b as well as receivables valued at HK$9.05b due within 12 months. So its liabilities total HK$3.88b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Kerry Logistics Network is worth HK$13.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Kerry Logistics Network boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Kerry Logistics Network's EBIT fell a jaw-dropping 61% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kerry Logistics Network can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Kerry Logistics Network 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. During the last three years, Kerry Logistics Network produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Kerry Logistics Network's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$249.3m. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in HK$2.2b. So we are not troubled with Kerry Logistics Network'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 - Kerry Logistics Network has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com