Is Kinepolis Group (EBR:KIN) A Risky Investment?

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.' 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. We can see that Kinepolis Group NV (EBR:KIN) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kinepolis Group

How Much Debt Does Kinepolis Group Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Kinepolis Group had debt of €546.7m, up from €489.9m in one year. However, it does have €33.0m in cash offsetting this, leading to net debt of about €513.7m.

How Healthy Is Kinepolis Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kinepolis Group had liabilities of €190.9m due within 12 months and liabilities of €850.8m due beyond that. Offsetting these obligations, it had cash of €33.0m as well as receivables valued at €34.2m due within 12 months. So it has liabilities totalling €974.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €1.24b, so it does suggest shareholders should keep an eye on Kinepolis Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kinepolis Group 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.

In the last year Kinepolis Group had a loss before interest and tax, and actually shrunk its revenue by 68%, to €176m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Kinepolis Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €66m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €65m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 2 warning signs for Kinepolis Group (1 makes us a bit uncomfortable!) 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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