Stock Analysis

Is Dukang Distillers Holdings (SGX:BKV) Weighed On By Its Debt Load?

SGX:BKV
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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Dukang Distillers Holdings Limited (SGX:BKV) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dukang Distillers Holdings

What Is Dukang Distillers Holdings's Net Debt?

As you can see below, Dukang Distillers Holdings had CN¥115.0m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥74.3m in cash offsetting this, leading to net debt of about CN¥40.7m.

debt-equity-history-analysis
SGX:BKV Debt to Equity History June 21st 2021

How Strong Is Dukang Distillers Holdings' Balance Sheet?

According to the last reported balance sheet, Dukang Distillers Holdings had liabilities of CN¥292.6m due within 12 months, and liabilities of CN¥10.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥74.3m as well as receivables valued at CN¥696.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥228.3m.

This deficit casts a shadow over the CN¥74.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Dukang Distillers Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dukang Distillers 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 Dukang Distillers Holdings had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥109m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Dukang Distillers Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥62m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥28m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Dukang Distillers Holdings (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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