We Think Kenly Precision Industrial (GTSM:5383) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Kenly Precision Industrial Co., LTD. (GTSM:5383) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

See our latest analysis for Kenly Precision Industrial

What Is Kenly Precision Industrial's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kenly Precision Industrial had NT$444.1m of debt in September 2020, down from NT$738.0m, one year before. However, it also had NT$207.2m in cash, and so its net debt is NT$236.9m.

A Look At Kenly Precision Industrial's Liabilities

We can see from the most recent balance sheet that Kenly Precision Industrial had liabilities of NT$288.8m falling due within a year, and liabilities of NT$488.3m due beyond that. Offsetting these obligations, it had cash of NT$207.2m as well as receivables valued at NT$306.5m due within 12 months. So it has liabilities totalling NT$263.4m more than its cash and near-term receivables, combined.

Of course, Kenly Precision Industrial has a market capitalization of NT$1.60b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kenly Precision Industrial will need earnings to service that debt. 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.

Over 12 months, Kenly Precision Industrial reported revenue of NT$1.0b, which is a gain of 4.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Kenly Precision Industrial had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$151m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$11m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Kenly Precision Industrial (2 are concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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