We Think Kontrol Energy (CSE:KNR) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Kontrol Energy Corp. (CSE:KNR) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kontrol Energy

What Is Kontrol Energy's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Kontrol Energy had debt of CA$12.4m, up from CA$9.89m in one year. However, it also had CA$3.07m in cash, and so its net debt is CA$9.36m.

How Healthy Is Kontrol Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kontrol Energy had liabilities of CA$10.5m due within 12 months and liabilities of CA$7.09m due beyond that. Offsetting these obligations, it had cash of CA$3.07m as well as receivables valued at CA$3.16m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$11.4m.

Since publicly traded Kontrol Energy shares are worth a total of CA$106.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kontrol Energy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Kontrol Energy made a loss at the EBIT level, and saw its revenue drop to CA$12m, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

While Kontrol Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CA$184k at the EBIT level. 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. However, it doesn't help that it burned through CA$101k of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Kontrol Energy is showing 3 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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