These 4 Measures Indicate That Kogan.com (ASX:KGN) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Kogan.com Ltd (ASX:KGN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Kogan.com

How Much Debt Does Kogan.com Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Kogan.com had AU$2.71m of debt, an increase on none, over one year. However, it does have AU$79.0m in cash offsetting this, leading to net cash of AU$76.2m.

How Strong Is Kogan.com's Balance Sheet?

The latest balance sheet data shows that Kogan.com had liabilities of AU$206.8m due within a year, and liabilities of AU$9.64m falling due after that. Offsetting these obligations, it had cash of AU$79.0m as well as receivables valued at AU$7.45m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$130.1m.

Since publicly traded Kogan.com shares are worth a total of AU$1.08b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Kogan.com also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Kogan.com grew its EBIT by 130% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kogan.com'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Kogan.com 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. Looking at the most recent three years, Kogan.com recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Kogan.com's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$76.2m. And it impressed us with its EBIT growth of 130% over the last year. So is Kogan.com's debt a risk? It doesn't seem so to us. 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 instance, we've identified 3 warning signs for Kogan.com (1 is significant) you should be aware of.

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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