Is Kadestone Capital (CVE:KDSX) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Kadestone Capital Corp. (CVE:KDSX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kadestone Capital

What Is Kadestone Capital's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Kadestone Capital had debt of CA$17.0m, up from CA$15.9m in one year. On the flip side, it has CA$3.52m in cash leading to net debt of about CA$13.5m.

How Healthy Is Kadestone Capital's Balance Sheet?

According to the last reported balance sheet, Kadestone Capital had liabilities of CA$7.97m due within 12 months, and liabilities of CA$10.1m due beyond 12 months. Offsetting these obligations, it had cash of CA$3.52m as well as receivables valued at CA$312.8k due within 12 months. So its liabilities total CA$14.2m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Kadestone Capital is worth CA$49.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Kadestone Capital'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.

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

Caveat Emptor

Importantly, Kadestone Capital had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$922k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$3.1m of cash over the last year. So suffice it to say we consider the stock very risky. 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. We've identified 4 warning signs with Kadestone Capital (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.