Is Kingland Property (GTSM:6264) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Kingland Property Corporation Ltd. (GTSM:6264) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kingland Property

What Is Kingland Property's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Kingland Property had debt of NT$1.57b, up from NT$1.30b in one year. However, it does have NT$126.2m in cash offsetting this, leading to net debt of about NT$1.44b.

How Healthy Is Kingland Property's Balance Sheet?

According to the last reported balance sheet, Kingland Property had liabilities of NT$704.1m due within 12 months, and liabilities of NT$1.05b due beyond 12 months. On the other hand, it had cash of NT$126.2m and NT$175.6m worth of receivables due within a year. So its liabilities total NT$1.46b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the NT$921.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Kingland Property would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kingland Property'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.

Over 12 months, Kingland Property reported revenue of NT$254m, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Kingland Property's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost NT$49m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of NT$292m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Kingland Property (1 is significant) 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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