Is Kingsgate Consolidated (ASX:KCN) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that Kingsgate Consolidated Limited (ASX:KCN) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Kingsgate Consolidated

How Much Debt Does Kingsgate Consolidated Carry?

You can click the graphic below for the historical numbers, but it shows that Kingsgate Consolidated had AU$11.5m of debt in December 2020, down from AU$12.7m, one year before. However, its balance sheet shows it holds AU$15.3m in cash, so it actually has AU$3.78m net cash.

How Healthy Is Kingsgate Consolidated's Balance Sheet?

We can see from the most recent balance sheet that Kingsgate Consolidated had liabilities of AU$2.72m falling due within a year, and liabilities of AU$33.4m due beyond that. On the other hand, it had cash of AU$15.3m and AU$286.0k worth of receivables due within a year. So it has liabilities totalling AU$20.6m more than its cash and near-term receivables, combined.

Of course, Kingsgate Consolidated has a market capitalization of AU$186.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Kingsgate Consolidated boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Kingsgate Consolidated's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

So How Risky Is Kingsgate Consolidated?

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 Kingsgate Consolidated had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$8.6m of cash and made a loss of AU$17m. With only AU$3.78m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Kingsgate Consolidated may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Kingsgate Consolidated's profit, revenue, and operating cashflow have changed over the last few years.

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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