Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, KNT Holdings Limited (HKG:1025) is in debt. But does this debt worry shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, 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 at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for KNT Holdings
What is KNT Holdings’ net debt?
You can click on the chart below for historical numbers, but it shows KNT Holdings had HK$24.8 million in debt in March 2022, up from HK$35.3 million a year earlier. But he also has HK$58.4 million in cash to offset that, meaning he has a net cash of HK$33.6 million.
How strong is KNT Holdings’ balance sheet?
According to the latest published balance sheet, KNT Holdings had liabilities of HK$35.6 million due within 12 months and liabilities of HK$5.94 million due beyond 12 months. In return, he had HK$58.4 million in cash and HK$14.3 million in debt due within 12 months. It can therefore boast that it has HK$31.2 million more in cash than total Passives.
This surplus suggests that KNT Holdings has a conservative balance sheet and could probably eliminate its debt without too much difficulty. In short, KNT Holdings has net cash, so it’s fair to say that it doesn’t have heavy debt! When analyzing debt levels, the balance sheet is the obvious starting point. But it is the earnings of KNT Holdings that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
On a 12-month basis, KNT Holdings posted revenue of HK$80 million, a 28% gain, although it reported no earnings before interest and taxes. With a little luck, the company will be able to progress towards profitability.
So how risky is KNT Holdings?
Statistically speaking, businesses that lose money are riskier than those that make money. And we note that KNT Holdings posted a loss in earnings before interest and taxes (EBIT) over the past year. Indeed, during this period, it burned HK$12 million and suffered a loss of HK$25 million. With just HK$33.6 million on the balance sheet, it looks like it will soon have to raise capital again. With very solid revenue growth over the past year, KNT Holdings could be on the road to profitability. By investing before these profits, shareholders take on more risk in the hope of greater rewards. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, KNT Holdings has 4 warning signs (and 2 that are a bit obnoxious) that we think you should know about.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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