Is KSB (NSE:KSB) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 KSB Limited (NSE:KSB) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy 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 KSB

What Is KSB's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 KSB had ₹602.0m of debt, an increase on ₹481.0m, over one year. However, it does have ₹3.43b in cash offsetting this, leading to net cash of ₹2.83b.

A Look At KSB's Liabilities

We can see from the most recent balance sheet that KSB had liabilities of ₹5.25b falling due within a year, and liabilities of ₹471.0m due beyond that. On the other hand, it had cash of ₹3.43b and ₹2.35b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that KSB's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹19.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that KSB has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that KSB's load is not too heavy, because its EBIT was down 28% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine KSB's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While KSB 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, KSB produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that KSB has net cash of ₹2.83b, as well as more liquid assets than liabilities. So we don't have any problem with KSB's use of debt. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for KSB you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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