Would Keong Hong Holdings (SGX:5TT) Be Better Off With Less Debt?

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 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. Importantly, Keong Hong Holdings Limited (SGX:5TT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Keong Hong Holdings

What Is Keong Hong Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Keong Hong Holdings had S$92.7m of debt in September 2021, down from S$136.2m, one year before. However, because it has a cash reserve of S$22.5m, its net debt is less, at about S$70.2m.

How Strong Is Keong Hong Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Keong Hong Holdings had liabilities of S$131.2m due within 12 months and liabilities of S$15.7m due beyond that. Offsetting this, it had S$22.5m in cash and S$76.9m in receivables that were due within 12 months. So it has liabilities totalling S$47.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of S$72.9m, so it does suggest shareholders should keep an eye on Keong Hong Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Keong Hong Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Keong Hong Holdings had a loss before interest and tax, and actually shrunk its revenue by 7.2%, to S$77m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Keong Hong Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping S$13m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled S$29m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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 4 warning signs we've spotted with Keong Hong Holdings (including 2 which are concerning) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.