Is Kalina Power (ASX:KPO) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Kalina Power Limited (ASX:KPO) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kalina Power

How Much Debt Does Kalina Power Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Kalina Power had AU$2.23m of debt, an increase on AU$2.03m, over one year. But it also has AU$2.92m in cash to offset that, meaning it has AU$693.5k net cash.

How Healthy Is Kalina Power's Balance Sheet?

We can see from the most recent balance sheet that Kalina Power had liabilities of AU$694.5k falling due within a year, and liabilities of AU$2.26m due beyond that. Offsetting these obligations, it had cash of AU$2.92m as well as receivables valued at AU$228.6k due within 12 months. So it actually has AU$195.1k more liquid assets than total liabilities.

This state of affairs indicates that Kalina Power'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 AU$18.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Kalina Power has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kalina Power will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given it has no significant operating revenue at the moment, shareholders will be hoping Kalina Power can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Kalina Power?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Kalina Power lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$4.8m of cash and made a loss of AU$4.5m. With only AU$693.5k on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Kalina Power (3 shouldn't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.