We Think Kung Sing Engineering (TWSE:5521) Can Stay On Top Of Its 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 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. We note that Kung Sing Engineering Corporation (TWSE:5521) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 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 Kung Sing Engineering

What Is Kung Sing Engineering's Net Debt?

As you can see below, at the end of March 2024, Kung Sing Engineering had NT$798.5m of debt, up from NT$452.7m a year ago. Click the image for more detail. But it also has NT$1.82b in cash to offset that, meaning it has NT$1.02b net cash.

A Look At Kung Sing Engineering's Liabilities

According to the last reported balance sheet, Kung Sing Engineering had liabilities of NT$2.98b due within 12 months, and liabilities of NT$165.7m due beyond 12 months. Offsetting this, it had NT$1.82b in cash and NT$2.60b in receivables that were due within 12 months. So it actually has NT$1.27b more liquid assets than total liabilities.

It's good to see that Kung Sing Engineering has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Kung Sing Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Kung Sing Engineering turned things around in the last 12 months, delivering and EBIT of NT$26m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kung Sing Engineering'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kung Sing Engineering 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 year, Kung Sing Engineering 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

While we empathize with investors who find debt concerning, you should keep in mind that Kung Sing Engineering has net cash of NT$1.02b, as well as more liquid assets than liabilities. So we don't have any problem with Kung Sing Engineering's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Kung Sing Engineering's earnings per share history for free.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com