Does KuangChi Science (HKG:439) Have A Healthy Balance Sheet?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that KuangChi Science Limited (HKG:439) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for KuangChi Science
How Much Debt Does KuangChi Science Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 KuangChi Science had HK$494.4m of debt, an increase on HK$444.4m, over one year. But it also has HK$498.2m in cash to offset that, meaning it has HK$3.83m net cash.
How Strong Is KuangChi Science's Balance Sheet?
The latest balance sheet data shows that KuangChi Science had liabilities of HK$509.6m due within a year, and liabilities of HK$226.1m falling due after that. On the other hand, it had cash of HK$498.2m and HK$222.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$15.5m.
This state of affairs indicates that KuangChi Science's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$2.19b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, KuangChi Science boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since KuangChi Science will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year KuangChi Science had negative earnings before interest and tax, and actually shrunk its revenue by 50%, to HK$103m. That makes us nervous, to say the least.
So How Risky Is KuangChi Science?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months KuangChi Science lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$291m and booked a HK$321m accounting loss. But at least it has HK$3.83m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like KuangChi Science I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
