Does King Wan (SGX:554) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that King Wan Corporation Limited (SGX:554) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for King Wan

How Much Debt Does King Wan Carry?

The image below, which you can click on for greater detail, shows that King Wan had debt of S$10.6m at the end of September 2022, a reduction from S$11.9m over a year. However, because it has a cash reserve of S$9.66m, its net debt is less, at about S$922.0k.

A Look At King Wan's Liabilities

Zooming in on the latest balance sheet data, we can see that King Wan had liabilities of S$55.2m due within 12 months and liabilities of S$3.06m due beyond that. Offsetting these obligations, it had cash of S$9.66m as well as receivables valued at S$35.7m due within 12 months. So its liabilities total S$13.0m more than the combination of its cash and short-term receivables.

King Wan has a market capitalization of S$26.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is King Wan'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.

In the last year King Wan wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to S$83m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, King Wan had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable S$4.8m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled S$3.2m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with King Wan .

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.