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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that King Fook Holdings Limited (HKG:280) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for King Fook Holdings
What Is King Fook Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 King Fook Holdings had HK$29.4m of debt, an increase on HK$42.8, over one year. But on the other hand it also has HK$205.3m in cash, leading to a HK$175.9m net cash position.
How Healthy Is King Fook Holdings's Balance Sheet?
The latest balance sheet data shows that King Fook Holdings had liabilities of HK$107.2m due within a year, and liabilities of HK$29.5m falling due after that. Offsetting these obligations, it had cash of HK$205.3m as well as receivables valued at HK$11.0m due within 12 months. So it can boast HK$79.6m more liquid assets than total liabilities.
It's good to see that King Fook Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that King Fook Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, King Fook Holdings turned things around in the last 12 months, delivering and EBIT of HK$8.4m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since King Fook Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.