Kaisa Capital Investment Holdings (HKG:936) has a somewhat stretched balance sheet
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Kaisa Capital Investment Holdings Limited (HKG:936) uses debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Kaisa Capital Investment Holdings
How much debt does Kaisa Capital Investment Holdings have?
You can click on the graph below for historical numbers, but it shows that in December 2021 Kaisa Capital Investment Holdings had HK$189.5 million in debt, up from HK$156.2 million. HK dollars, over one year. However, he has HK$26.4 million in cash, resulting in a net debt of approximately HK$163.2 million.
How strong is Kaisa Capital Investment Holdings’ balance sheet?
We can see from the most recent balance sheet that Kaisa Capital Investment Holdings had liabilities of HK$287.2 million due in one year, and liabilities of HK$130.6 million due beyond. In return, he had HK$26.4 million in cash and HK$89.0 million in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables of HK$302.4 million.
This shortfall is sizable compared to its market capitalization of HK$349.8 million, so it suggests shareholders should monitor Kaisa Capital Investment Holdings’ use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
While we’re not concerned about Kaisa Capital Investment Holdings’ net debt to EBITDA ratio of 4.1, we believe its extremely low interest coverage of 0.93x is a sign of high leverage. This is largely due to the company’s large amortization charges, which no doubt means that its EBITDA is a very generous measure of earnings, and that its debt may be heavier than it first appears. on board. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. However, the silver lining was that Kaisa Capital Investment Holdings achieved a positive EBIT of HK$9.6 million in the last twelve months, an improvement from the loss the previous year. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Kaisa Capital Investment Holdings will need income to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, while the taxman may love accounting profits, lenders only accept cash. It is therefore important to check how much of its earnings before interest and taxes (EBIT) converts into actual free cash flow. Over the past year, Kaisa Capital Investment Holdings has had negative free cash flow, overall. Debt is generally more expensive and almost always riskier in the hands of a company with negative free cash flow. Shareholders should hope for an improvement.
Our point of view
We would go so far as to say that Kaisa Capital Investment Holdings’ interest coverage was disappointing. That said, its ability to grow its EBIT is not such a concern. We are quite clear that we consider Kaisa Capital Investment Holdings to be quite risky indeed, given the health of its balance sheet. For this reason, we are quite cautious about the stock and believe shareholders should keep a close eye on its liquidity. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 2 warning signs for Kaisa Capital Investment Holdings you should be aware, and one of them is concerning.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.