Does K3 Business Technology Group (LON:KBT) Have A Healthy Balance Sheet?

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.' 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. We note that K3 Business Technology Group plc (LON:KBT) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out the opportunities and risks within the GB Software industry.

How Much Debt Does K3 Business Technology Group Carry?

The image below, which you can click on for greater detail, shows that at May 2022 K3 Business Technology Group had debt of UK£2.95m, up from UK£1.90m in one year. But it also has UK£4.32m in cash to offset that, meaning it has UK£1.37m net cash.

A Look At K3 Business Technology Group's Liabilities

We can see from the most recent balance sheet that K3 Business Technology Group had liabilities of UK£16.0m falling due within a year, and liabilities of UK£2.29m due beyond that. On the other hand, it had cash of UK£4.32m and UK£10.7m worth of receivables due within a year. So it has liabilities totalling UK£3.30m more than its cash and near-term receivables, combined.

Since publicly traded K3 Business Technology Group shares are worth a total of UK£57.0m, 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. While it does have liabilities worth noting, K3 Business Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is K3 Business Technology Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, K3 Business Technology Group reported revenue of UK£44m, which is a gain of 6.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is K3 Business Technology Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year K3 Business Technology Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through UK£2.0m of cash and made a loss of UK£6.7m. Given it only has net cash of UK£1.37m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 2 warning signs for K3 Business Technology Group you should be aware of, and 1 of them doesn't sit too well with us.

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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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.