Is Kleos Space (ASX:KSS) Weighed On By Its Debt Load?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Kleos Space S.A. (ASX:KSS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kleos Space

What Is Kleos Space's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Kleos Space had debt of €3.46m, up from €1.60m in one year. However, it does have €10.8m in cash offsetting this, leading to net cash of €7.33m.

A Look At Kleos Space's Liabilities

According to the balance sheet data, Kleos Space had liabilities of €5.05m due within 12 months, but no longer term liabilities. On the other hand, it had cash of €10.8m and €192.0k worth of receivables due within a year. So it can boast €5.93m more liquid assets than total liabilities.

This surplus suggests that Kleos Space has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kleos Space has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kleos Space can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

While it hasn't made a profit, at least Kleos Space booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Kleos Space?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Kleos Space had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €4.7m of cash and made a loss of €4.9m. Given it only has net cash of €7.33m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 3 warning signs for Kleos Space (2 are a bit unpleasant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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