Is Kian Shen (TPE:1525) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Kian Shen Corporation (TPE:1525) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kian Shen

How Much Debt Does Kian Shen Carry?

As you can see below, at the end of September 2020, Kian Shen had NT$260.0m of debt, up from NT$170.0m a year ago. Click the image for more detail. However, it does have NT$393.4m in cash offsetting this, leading to net cash of NT$133.4m.

A Look At Kian Shen's Liabilities

We can see from the most recent balance sheet that Kian Shen had liabilities of NT$550.1m falling due within a year, and liabilities of NT$364.3m due beyond that. Offsetting these obligations, it had cash of NT$393.4m as well as receivables valued at NT$187.1m due within 12 months. So its liabilities total NT$333.9m more than the combination of its cash and short-term receivables.

Since publicly traded Kian Shen shares are worth a total of NT$5.04b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Kian Shen boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Kian Shen's load is not too heavy, because its EBIT was down 83% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kian Shen can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kian Shen has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Kian Shen burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about Kian Shen's liabilities, but we can be reassured by the fact it has has net cash of NT$133.4m. So while Kian Shen does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should learn about the 2 warning signs we've spotted with Kian Shen (including 1 which is makes us a bit uncomfortable) .

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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