Kong Sun Holdings (HKG: 295) has no shortage of debt
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Kong Sun Holdings Limited (HKG: 295) carries a debt. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for Kong Sun Holdings
What is the debt of Kong Sun Holdings?
The image below, which you can click for more details, shows Kong Sun Holdings owed CN 5.80 billion in debt at the end of June 2021, a reduction from CN 9.13 billion year over year. . However, he also had CN 262.6 million in cash, so his net debt was CN 5.54 billion.
How healthy is Kong Sun Holdings’ balance sheet?
The latest balance sheet data shows Kong Sun Holdings had CN 2.79 billion in debt due within one year, and CN 4.17 billion in debt due thereafter. On the other hand, he had cash of CN 262.6 million and CN 4.10 billion worth of receivables due within one year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 2.59b CN.
This deficit casts a shadow over CN’s 873.7 million society like a towering colossus of mere mortals. So we would be watching its record closely, without a doubt. Ultimately, Kong Sun Holdings would likely need a major recapitalization if its creditors demanded repayment.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Kong Sun Holdings shareholders face the double whammy of a high net debt to EBITDA ratio (7.3) and relatively low interest coverage, as EBIT is only 0.66 times interest charges. This means that we would consider him to be in heavy debt. Worse yet, Kong Sun Holdings has seen its EBIT reach 37% in the past 12 months. If profits continue to follow this path, it will be more difficult to pay off this debt than to convince us to run a marathon in the rain. The balance sheet is clearly the area you need to focus on when analyzing debt. But you can’t look at debt in isolation; since Kong Sun Holdings will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Kong Sun Holdings has created free cash flow of 15% of its EBIT, a performance that is without interest. For us, the conversion to cash that elicits a bit of paranoia is the ability to extinguish debt.
Our point of view
To be frank, Kong Sun Holdings’ EBIT growth rate and track record of controlling its total liabilities make us rather uncomfortable with its debt levels. And furthermore, its net debt to EBITDA also fails to inspire confidence. We believe that the chances that Kong Sun Holdings are in too much debt are very important. In our opinion, this means that the stock is rather risky, and probably one to be avoided; but to each their own (investment) style. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with Kong Sun Holdings (at least 1 which is potentially serious), and understanding them should be part of your investment process.
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 net growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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