Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that KSH Holdings Limited (SGX:ER0) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KSH Holdings

What Is KSH Holdings's Debt?

As you can see below, at the end of March 2019, KSH Holdings had S$155.5m of debt, up from S$122.9m a year ago. Click the image for more detail. However, it does have S$74.1m in cash offsetting this, leading to net debt of about S$81.4m.

A Look At KSH Holdings's Liabilities

We can see from the most recent balance sheet that KSH Holdings had liabilities of S$150.6m falling due within a year, and liabilities of S$102.2m due beyond that. Offsetting this, it had S$74.1m in cash and S$65.3m in receivables that were due within 12 months. So its liabilities total S$113.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since KSH Holdings has a market capitalization of S$258.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.