We Think Kromek Group (LON:KMK) Has A Fair Chunk Of Debt

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. As with many other companies Kromek Group plc (LON:KMK) makes use of debt. But should shareholders be worried about its use of debt?

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Kromek Group Carry?

As you can see below, at the end of October 2024, Kromek Group had UK£12.3m of debt, up from UK£8.90m a year ago. Click the image for more detail. However, it also had UK£577.0k in cash, and so its net debt is UK£11.7m.

How Healthy Is Kromek Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kromek Group had liabilities of UK£18.9m due within 12 months and liabilities of UK£4.96m due beyond that. Offsetting these obligations, it had cash of UK£577.0k as well as receivables valued at UK£9.74m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£13.6m.

Kromek Group has a market capitalization of UK£31.1m, 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 it is future earnings, more than anything, that will determine Kromek Group'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.

See our latest analysis for Kromek Group

Over 12 months, Kromek Group made a loss at the EBIT level, and saw its revenue drop to UK£16m, which is a fall of 9.3%. We would much prefer see growth.

Caveat Emptor

Importantly, Kromek Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£4.1m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through UK£5.8m 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Kromek Group .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.