Keyware Technologies (EBR:KEYW) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, '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, Keyware Technologies NV (EBR:KEYW) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Keyware Technologies

How Much Debt Does Keyware Technologies Carry?

As you can see below, at the end of June 2022, Keyware Technologies had €1.91m of debt, up from €1.56m a year ago. Click the image for more detail. But it also has €2.60m in cash to offset that, meaning it has €687.0k net cash.

How Strong Is Keyware Technologies' Balance Sheet?

According to the last reported balance sheet, Keyware Technologies had liabilities of €5.95m due within 12 months, and liabilities of €4.45m due beyond 12 months. Offsetting this, it had €2.60m in cash and €10.4m in receivables that were due within 12 months. So it can boast €2.63m more liquid assets than total liabilities.

This surplus suggests that Keyware Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Keyware Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Keyware Technologies turned things around in the last 12 months, delivering and EBIT of €1.2m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Keyware Technologies's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Keyware Technologies 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. Happily for any shareholders, Keyware Technologies actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Keyware Technologies has net cash of €687.0k, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €2.0m, being 172% of its EBIT. So we don't think Keyware Technologies's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Keyware Technologies (including 2 which are a bit concerning) .

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.