We Think Kindom Development (TWSE:2520) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Kindom Development Co., Ltd. (TWSE:2520) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kindom Development

What Is Kindom Development's Debt?

As you can see below, Kindom Development had NT$16.1b of debt at June 2024, down from NT$19.1b a year prior. However, it does have NT$17.3b in cash offsetting this, leading to net cash of NT$1.16b.

How Strong Is Kindom Development's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kindom Development had liabilities of NT$26.2b due within 12 months and liabilities of NT$5.92b due beyond that. Offsetting this, it had NT$17.3b in cash and NT$4.62b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$10.2b.

Kindom Development has a market capitalization of NT$29.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Kindom Development also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Kindom Development has boosted its EBIT by 81%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kindom Development's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Kindom Development may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Kindom Development actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Kindom Development's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$1.16b. And it impressed us with free cash flow of NT$6.3b, being 101% of its EBIT. So we don't think Kindom Development's use of debt is 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. Case in point: We've spotted 2 warning signs for Kindom Development 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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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.