David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Kin Pang Holdings Limited (HKG: 1722) uses debt. But does this debt worry shareholders?
When is Debt a Problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies 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 flow and debt together.
Check out our latest review for Kin Pang Holdings
What is Kin Pang Holdings’ net debt?
As you can see below, at the end of June 2021, Kin Pang Holdings was in debt of US $ 101.1 million, up from US $ 28.2 million a year ago. Click on the image for more details. However, he also had US $ 62.6 million in cash, so his net debt is US $ 38.5 million.
How strong is Kin Pang Holdings’ balance sheet?
We can see from the most recent balance sheet that Kin Pang Holdings had a liability of US $ 300.4 million due within one year and a liability of US $ 29.5 million due beyond. On the other hand, it had $ 62.6 million in cash and $ 344.7 million in receivables due within one year. So he actually has MO $ 77.3 million Following liquid assets as total liabilities.
This excess liquidity is a good indication that Kin Pang Holdings’ balance sheet is almost as strong as that of Fort Knox. Given this fact, we believe its track record is as strong as an ox.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt compared to EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Kin Pang Holdings has a low net debt to EBITDA ratio of just 1.3. And its EBIT easily covers its interest costs, which is 29.8 times the size. So we’re pretty relaxed about its ultra-conservative use of debt. And we also warmly note that Kin Pang Holdings increased its EBIT by 12% last year, which makes its debt more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But it is Kin Pang Holdings’ earnings that will influence balance sheet performance in the future. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Kin Pang Holdings has spent a lot of money. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
The good news is that Kin Pang Holdings’ demonstrated ability to cover interest costs with EBIT delights us like a fluffy puppy does a toddler. But the hard truth is that we are concerned about its conversion from EBIT to free cash flow. Zooming out, Kin Pang Holdings appears to be using the debt quite sensibly; and that gets the nod from us. While debt comes with risk, when used wisely, it can also generate a better return on equity. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 3 warning signs for Kin Pang Holdings (1 is potentially serious) you should be aware of.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.