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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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Kiu Hung International Holdings Limited (HKG:381) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Kiu Hung International Holdings
What Is Kiu Hung International Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Kiu Hung International Holdings had debt of HK$329.2m, up from HK$216.7m in one year. However, it also had HK$7.75m in cash, and so its net debt is HK$321.5m.
A Look At Kiu Hung International Holdings's Liabilities
The latest balance sheet data shows that Kiu Hung International Holdings had liabilities of HK$501.4m due within a year, and liabilities of HK$25.1m falling due after that. On the other hand, it had cash of HK$7.75m and HK$20.9m worth of receivables due within a year. So its liabilities total HK$498.0m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the HK$237.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt After all, Kiu Hung International Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kiu Hung International Holdings 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.