Kingsmen Creatives (SGX:5MZ) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Kingsmen Creatives Ltd. (SGX:5MZ) does carry debt. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Kingsmen Creatives

What Is Kingsmen Creatives's Net Debt?

The image below, which you can click on for greater detail, shows that Kingsmen Creatives had debt of S$28.9m at the end of December 2021, a reduction from S$34.8m over a year. However, it does have S$81.5m in cash offsetting this, leading to net cash of S$52.7m.

A Look At Kingsmen Creatives' Liabilities

Zooming in on the latest balance sheet data, we can see that Kingsmen Creatives had liabilities of S$116.5m due within 12 months and liabilities of S$24.8m due beyond that. On the other hand, it had cash of S$81.5m and S$99.0m worth of receivables due within a year. So it can boast S$39.1m more liquid assets than total liabilities.

This luscious liquidity implies that Kingsmen Creatives' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Kingsmen Creatives boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kingsmen Creatives 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.

In the last year Kingsmen Creatives had a loss before interest and tax, and actually shrunk its revenue by 4.8%, to S$273m. We would much prefer see growth.

So How Risky Is Kingsmen Creatives?

Although Kingsmen Creatives had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of S$1.0m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. 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 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.