Is Kalray (EPA:ALKAL) Using Debt Sensibly?

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.' 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 Kalray S.A. (EPA:ALKAL) does use debt in its business. But is this debt a concern to shareholders?

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 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kalray

How Much Debt Does Kalray Carry?

The image below, which you can click on for greater detail, shows that Kalray had debt of €10.1m at the end of June 2023, a reduction from €15.8m over a year. But it also has €23.1m in cash to offset that, meaning it has €13.0m net cash.

How Healthy Is Kalray's Balance Sheet?

According to the last reported balance sheet, Kalray had liabilities of €7.52m due within 12 months, and liabilities of €24.4m due beyond 12 months. Offsetting this, it had €23.1m in cash and €14.7m in receivables that were due within 12 months. So it actually has €5.91m more liquid assets than total liabilities.

This surplus suggests that Kalray has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kalray boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kalray's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Kalray reported revenue of €41m, which is a gain of 118%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Kalray?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Kalray lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €17m and booked a €11m accounting loss. But at least it has €13.0m on the balance sheet to spend on growth, near-term. Importantly, Kalray's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Kalray (1 shouldn't be ignored) you should be aware of.

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.