Is Kadestone Capital (CVE:KDSX) Using Too Much Debt?

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.' 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 can see that Kadestone Capital Corp. (CVE:KDSX) does use debt in its business. But the real question is whether this debt is making the company risky.

We've discovered 5 warning signs about Kadestone Capital. View them for free.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Kadestone Capital's Debt?

You can click the graphic below for the historical numbers, but it shows that Kadestone Capital had CA$11.0m of debt in December 2024, down from CA$16.1m, one year before. However, because it has a cash reserve of CA$1.20m, its net debt is less, at about CA$9.80m.

How Strong Is Kadestone Capital's Balance Sheet?

We can see from the most recent balance sheet that Kadestone Capital had liabilities of CA$2.37m falling due within a year, and liabilities of CA$10.0m due beyond that. On the other hand, it had cash of CA$1.20m and CA$519.2k worth of receivables due within a year. So it has liabilities totalling CA$10.7m more than its cash and near-term receivables, combined.

Kadestone Capital has a market capitalization of CA$44.6m, so it could very likely raise cash to ameliorate 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 you can't view debt in total isolation; since Kadestone Capital 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.

See our latest analysis for Kadestone Capital

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

Not only did Kadestone Capital'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 CA$3.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 CA$5.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that Kadestone Capital is showing 5 warning signs in our investment analysis , and 4 of those are potentially serious...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.