We Think King Wan (SGX:554) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 King Wan Corporation Limited (SGX:554) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for King Wan

What Is King Wan's Debt?

The image below, which you can click on for greater detail, shows that King Wan had debt of S$11.2m at the end of March 2022, a reduction from S$33.4m over a year. However, it does have S$18.0m in cash offsetting this, leading to net cash of S$6.76m.

How Healthy Is King Wan's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that King Wan had liabilities of S$52.4m due within 12 months and liabilities of S$3.78m due beyond that. Offsetting this, it had S$18.0m in cash and S$31.1m in receivables that were due within 12 months. So its liabilities total S$7.16m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since King Wan has a market capitalization of S$27.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, King Wan also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, King Wan turned things around in the last 12 months, delivering and EBIT of S$225k. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since King Wan 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. King Wan 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. Happily for any shareholders, King Wan actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While King Wan does have more liabilities than liquid assets, it also has net cash of S$6.76m. And it impressed us with free cash flow of S$3.3m, being 1,488% of its EBIT. So we don't think King Wan's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with King Wan (including 1 which doesn't sit too well with us) .

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.