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Will Kingsmen Creatives Ltd Be Able to Survive the Tough Times?

Kingsmen Creatives Ltd (SGX: 5MZ) is a communication design and production group that is involved in designing and fitting out of retail shops, among others. Some of its clients include DBS Group Holdings Ltd (SGX: D05), StarHub Ltd (SGX: CC3) and Coach Inc (NYSE: COH).

Recently, the firm saw a drop in earnings. For the financial year ended 31 December 2016 (FY2016), Kingsmen had a net profit of S$11.9 million, a 38% decrease from the previous year. Excluding one-off gains seen in FY2015, the net profit would have declined close to 9% year-on-year.

Would Kingsmen be able to weather the storm and emerge unscathed many years later? To answer that question, we have to turn our attention to the Balance Sheet (also known as Statement of Financial Position) of the company.

The balance sheet offers a snapshot of a firm’s health. It tells us how much a company owns (or “Assets”), and how much it owes (or “Liabilities”). The difference between what it owns and what it owes is its equity (also known as “Shareholders’ Equity).

The following is the balance sheet of the firm as at 31 December 2016:

Source: Kingsmen Creatives Ltd FY2016 Annual Report 

We will focus on three aspects of the balance sheet and they are “Cash and cash equivalents” (shown in blue), “Other financial liabilities” (shown in red) and “Retained earnings” (shown in green).

Cash and cash equivalents

Kingsmen had a cash position of S$76.2 million as at 31 December 2016, a step-up over the previous year’s figure of S$72.6 million.

This is a healthy sign. Cash allows protection against tough times, and it also give a company the flexibility for future growth. Growing cash reserves often point to a strong company performance.

Other financial liabilities

Also known as debt or borrowings, it is broken down into long-term (non-current or due more than a year later) and short-term (current or obligations the firm must pay within a year).

As at 31 December 2016, the total borrowings (non-current plus current) came up to around S$11 million. This is an improvement from the previous year’s debt of S$13 million.

Since the debt level of S$11 million is less than three times its FY2016 net profit of close to S$12 million, the debt is extremely manageable. Theoretically, it only needs one year of net profit to pay off its debt obligations in full.

Retained earnings

It is the accumulated amount of a firm’s prior earnings, after paying out the dividends to shareholders. This amount can then be reinvested into its own business for growth or used to pay off debt.

It is encouraging that the retained earnings of Kingsmen had grown from S$87 million to S$93 million, as at 31 December 2016.

Foolish takeaway

Kingsmen has a healthy balance sheet fortified with loads of cash. Together with the low debt levels and increasing retained earnings, it is highly likely that Kingsmen will be able to survive the tough times that it is facing currently.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.