We Think Kin and Carta (LON:KCT) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Kin and Carta plc (LON:KCT) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.

Check out our latest analysis for Kin and Carta

How Much Debt Does Kin and Carta Carry?

The image below, which you can click on for greater detail, shows that at January 2021 Kin and Carta had debt of UK£48.5m, up from UK£45.2m in one year. However, it does have UK£25.9m in cash offsetting this, leading to net debt of about UK£22.6m.

How Healthy Is Kin and Carta's Balance Sheet?

According to the last reported balance sheet, Kin and Carta had liabilities of UK£44.5m due within 12 months, and liabilities of UK£66.6m due beyond 12 months. On the other hand, it had cash of UK£25.9m and UK£33.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£51.4m.

Of course, Kin and Carta has a market capitalization of UK£338.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kin and Carta can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Kin and Carta made a loss at the EBIT level, and saw its revenue drop to UK£130m, which is a fall of 3.6%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Kin and Carta produced an earnings before interest and tax (EBIT) loss. Indeed, it lost UK£973k at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of UK£31m. In the meantime, we consider the stock very 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 be aware of the 2 warning signs we've spotted with Kin and Carta .

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. 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.
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