Stock Analysis

Is Keong Hong Holdings (SGX:5TT) Using Debt In A Risky Way?

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SGX:5TT

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Keong Hong Holdings Limited (SGX:5TT) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Keong Hong Holdings

How Much Debt Does Keong Hong Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Keong Hong Holdings had S$14.2m of debt in September 2024, down from S$26.1m, one year before. But it also has S$21.8m in cash to offset that, meaning it has S$7.57m net cash.

SGX:5TT Debt to Equity History January 29th 2025

A Look At Keong Hong Holdings' Liabilities

The latest balance sheet data shows that Keong Hong Holdings had liabilities of S$112.1m due within a year, and liabilities of S$26.6m falling due after that. Offsetting this, it had S$21.8m in cash and S$89.2m in receivables that were due within 12 months. So it has liabilities totalling S$27.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the S$17.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Keong Hong Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Keong Hong Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Keong Hong Holdings 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.

Over 12 months, Keong Hong Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Keong Hong Holdings?

Although Keong Hong Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of S$1.1m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. To that end, you should learn about the 3 warning signs we've spotted with Keong Hong Holdings (including 2 which shouldn't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Valuation is complex, but we're here to simplify it.

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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.