Here's Why Kingfa Science & Technology (India) (NSE:KINGFA) Can Manage Its Debt Responsibly

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.' 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. We can see that Kingfa Science & Technology (India) Limited (NSE:KINGFA) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kingfa Science & Technology (India)

How Much Debt Does Kingfa Science & Technology (India) Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Kingfa Science & Technology (India) had ₹435.4m of debt, an increase on ₹250.0m, over one year. On the flip side, it has ₹227.6m in cash leading to net debt of about ₹207.8m.

How Strong Is Kingfa Science & Technology (India)'s Balance Sheet?

The latest balance sheet data shows that Kingfa Science & Technology (India) had liabilities of ₹4.06b due within a year, and liabilities of ₹40.3m falling due after that. Offsetting these obligations, it had cash of ₹227.6m as well as receivables valued at ₹4.08b due within 12 months. So it can boast ₹212.8m more liquid assets than total liabilities.

This state of affairs indicates that Kingfa Science & Technology (India)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹40.5b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Kingfa Science & Technology (India) has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Kingfa Science & Technology (India)'s net debt is only 0.10 times its EBITDA. And its EBIT easily covers its interest expense, being 48.2 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Fortunately, Kingfa Science & Technology (India) grew its EBIT by 8.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kingfa Science & Technology (India) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Kingfa Science & Technology (India) reported free cash flow worth 4.6% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Happily, Kingfa Science & Technology (India)'s impressive interest cover implies it has the upper hand on its debt. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. All these things considered, it appears that Kingfa Science & Technology (India) can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Kingfa Science & Technology (India) you should be aware of, and 1 of them is potentially serious.

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.