Is China Kings Resources GroupLtd (SHSE:603505) Taking Too Much Debt?

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 thinking about how risky a particular stock is It may be obvious that you need to consider debt, because too much debt can ruin a business. As with many other companies China Kings Resources Group Co., Ltd. (SHSE:603505) uses debt. But the real question is whether this debt makes the company risky.

Why does debt pose risks?

Debt and other liabilities become risky for a company when it cannot easily meet those obligations, either through free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While this isn’t all that common, we often see indebted companies permanently diluting their shareholders because lenders force them to raise capital at a distressed price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high returns. When we examine debt levels, we first consider both cash and debt levels together.

Check out our latest analysis for China Kings Resources GroupLtd

How much debt does China Kings Resources GroupLtd have?

The image below, which you can click on for more details, shows that China Kings Resources GroupLtd had CN¥2.62 billion of debt as of September 2024, up from CN¥1.81 billion in one year. However, since the company has a cash reserve of CN¥425.1 million, its net debt is lower, at about CN¥2.20 billion.

How healthy is China Kings Resources GroupLtd’s balance sheet?

Zooming in on the latest balance sheet data, we can see that China Kings Resources Group Ltd had liabilities of CN¥3.18b due within 12 months and liabilities of CN¥1.13b. CN¥ that were due beyond this. Offsetting these obligations, it had cash of CN¥425.1m as well as receivables valued at CN¥1.06b due within 12 months. So its liabilities total CN¥2.82b more than its cash and short-term receivables combined.

Given that China Kings Resources GroupLtd has a market capitalization of CN¥15.1b, it’s hard to believe that these liabilities pose much of a threat. Still, it’s clear that we should continue to monitor its balance sheet to ensure it doesn’t get worse.

To measure a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Therefore, we look at debt relative to earnings both with and without depreciation charges.

China Kings Resources GroupLtd’s net debt is 3.8 times its EBITDA, which represents significant but still reasonable leverage. However, the interest coverage is very high at 1,000, which suggests that the interest expense on the debt is currently quite low. The bad news is that China Kings Resources Group Ltd saw its EBIT decline by 13% last year. If that decline isn’t halted, managing its debt will be harder than selling broccoli-flavored ice cream at a premium. The balance sheet is clearly the area you should focus on when analyzing debt. However, the company’s future profitability will ultimately determine whether China Kings Resources GroupLtd can strengthen its balance sheet over time. So if you’re focused on the future, you can look at that free Report with analyst profit forecasts.

After all, a company needs free cash flow to pay off debt; Book profits are simply not enough. So it’s worth checking how much of that EBIT is covered by free cash flow. Over the past three years, China Kings Resources GroupLtd has burned through a lot of cash. While this may be due to growth spending, it makes debt significantly riskier.

Our view

When we think about China Kings Resources GroupLtd’s attempt to convert EBIT into free cash flow, we’re certainly not thrilled. But at least the company manages quite well to cover its interest expenses with its EBIT; that is encouraging. When we consider all of the above factors together, it seems to us that China Kings Resources GroupLtd’s debt makes the company somewhat risky. That’s not necessarily a bad thing, but in general we would feel more comfortable with less leverage. There is no doubt that the balance sheet is where we learn the most about debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we discovered it 4 Warning Signs for China Kings Resources GroupLtd (2 are worrisome!) that you should know before investing here.

Ultimately, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% freeat the moment.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.