Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Keystone Technology Co.,Ltd. (SHSE:605588) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Keystone TechnologyLtd Carry?
As you can see below, at the end of September 2023, Keystone TechnologyLtd had CN¥355.6m of debt, up from CN¥70.5m a year ago. Click the image for more detail. But it also has CN¥827.3m in cash to offset that, meaning it has CN¥471.7m net cash.
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A Look At Keystone TechnologyLtd's Liabilities
According to the last reported balance sheet, Keystone TechnologyLtd had liabilities of CN¥535.6m due within 12 months, and liabilities of CN¥138.5m due beyond 12 months. On the other hand, it had cash of CN¥827.3m and CN¥364.9m worth of receivables due within a year. So it actually has CN¥518.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Keystone TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Keystone TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Keystone TechnologyLtd's saving grace is its low debt levels, because its EBIT has tanked 38% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Keystone TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Keystone TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Keystone TechnologyLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case Keystone TechnologyLtd has CN¥471.7m in net cash and a decent-looking balance sheet. So while Keystone TechnologyLtd does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Keystone TechnologyLtd (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.