Does Kingsmen Creatives (SGX:5MZ) Have A Healthy Balance Sheet?

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.' 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. We note that Kingsmen Creatives Ltd. (SGX:5MZ) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kingsmen Creatives

What Is Kingsmen Creatives's Debt?

As you can see below, at the end of December 2020, Kingsmen Creatives had S$34.8m of debt, up from S$33.4m a year ago. Click the image for more detail. However, it does have S$82.4m in cash offsetting this, leading to net cash of S$47.6m.

How Healthy Is Kingsmen Creatives' Balance Sheet?

The latest balance sheet data shows that Kingsmen Creatives had liabilities of S$128.8m due within a year, and liabilities of S$29.2m falling due after that. Offsetting these obligations, it had cash of S$82.4m as well as receivables valued at S$101.9m due within 12 months. So it actually has S$26.4m more liquid assets than total liabilities.

This surplus strongly suggests that Kingsmen Creatives has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Kingsmen Creatives boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kingsmen Creatives'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 Kingsmen Creatives had a loss before interest and tax, and actually shrunk its revenue by 22%, to S$287m. To be frank that doesn't bode well.

So How Risky Is Kingsmen Creatives?

While Kingsmen Creatives lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow S$17m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Kingsmen Creatives is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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.

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This article by Simply Wall St is general in nature. 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.
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