Share Dilution

Is Kwan Yong Holdings (HKG: 9998) risky using debt?


Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Kwan Yong Holdings Limited (HKG: 9998) uses debt. But does this debt worry shareholders?

Why Does Debt Bring Risk?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest 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.

See our latest analysis for Kwan Yong Holdings

What is the debt of Kwan Yong Holdings?

As you can see below, at the end of December 2020, Kwan Yong Holdings was in debt of S $ 6.07 million, up from S $ 2.26 million a year ago. Click on the image for more details. But he also has S $ 41.5 million in cash to make up for that, which means he has a net cash of S $ 35.5 million.

SEHK: 9998 History of debt to equity July 1, 2021

A look at the liabilities of Kwan Yong Holdings

The latest balance sheet data shows that Kwan Yong Holdings had S $ 54.8 million in debt due within one year, and S $ 5.74 million in debt maturing thereafter. In return, he had S $ 41.5 million in cash and S $ 27.5 million in receivables due within 12 months. So he actually has S $ 8.58 million After liquid assets as total liabilities.

This excess liquidity suggests that Kwan Yong Holdings is taking a cautious approach to debt. Because he has a lot of assets, he is unlikely to have any problems with his lenders. In short, Kwan Yong Holdings has net cash, so it’s fair to say that it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Kwan Yong Holdings will need income to repay this debt. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.

Over 12 months, Kwan Yong Holdings recorded a loss in EBIT and saw its revenue fall to S $ 68 million, a decrease of 61%. It makes us nervous, to say the least.

So how risky is Kwan Yong Holdings?

While Kwan Yong Holdings lost money on earnings before interest and taxes (EBIT), it actually generated positive free cash flow of S $ 9.0 million. Thus, although it is in deficit, it does not appear to present too much short-term balance sheet risk, given the net cash position. We will feel more comfortable with the stock once EBIT is positive, given the weak revenue growth. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. To this end, you should inquire about the 3 warning signs we spotted with Kwan Yong Holdings (including 1 which does not suit us too much).

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash-flow-growing stocks today.

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