Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We notice that Kiddieland International Limited (HKG: 3830) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Kiddieland International
What is the debt of Kiddieland International?
You can click on the graph below for historical figures, but it shows that Kiddieland International was in debt of HK $ 16.2million in October 2021, up from HK $ 22.7million a year earlier. On the other hand, he has HK $ 13.0million in cash, resulting in net debt of around HK $ 3.16million.
A look at the responsibilities of Kiddieland International
We can see from the most recent balance sheet that Kiddieland International had a liability of HK $ 54.1 million due within one year, and a liability of HK $ 1.70 million due beyond. In return, he had HK $ 13.0 million in cash and HK $ 60.9 million in receivables due within 12 months. He can therefore boast of having HK $ 18.1 million more in liquid assets than total Liabilities.
This short-term liquidity is a sign that Kiddieland International could probably repay its debt easily, as its balance sheet is far from tight. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Kiddieland International will need revenue to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over the past year, Kiddieland International has incurred a loss before interest and taxes and has actually reduced its income by 11% to HK $ 251 million. We would much prefer to see the growth.
Not only has Kiddieland International’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Indeed, he lost HK $ 16 million in EBIT. Looking on the bright side, the business has adequate liquid assets, giving it time to grow and develop before its debt becomes a problem in the short term. But we would be more likely to spend time trying to figure out the stock if the company was making a profit. So it seems too risky for our taste. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Note that Kiddieland International shows 1 warning sign in our investment analysis , you must know…
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow-growing stocks.
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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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.