Here's Why K3 Business Technology Group (LON:KBT) Can Afford Some Debt

By
Simply Wall St
Published
May 25, 2021
AIM:KBT
Source: Shutterstock

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that K3 Business Technology Group plc (LON:KBT) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for K3 Business Technology Group

How Much Debt Does K3 Business Technology Group Carry?

As you can see below, at the end of November 2020, K3 Business Technology Group had UK£12.4m of debt, up from UK£10.6m a year ago. Click the image for more detail. However, it does have UK£9.31m in cash offsetting this, leading to net debt of about UK£3.14m.

debt-equity-history-analysis
AIM:KBT Debt to Equity History May 26th 2021

How Strong Is K3 Business Technology Group's Balance Sheet?

According to the last reported balance sheet, K3 Business Technology Group had liabilities of UK£37.4m due within 12 months, and liabilities of UK£3.04m due beyond 12 months. On the other hand, it had cash of UK£9.31m and UK£10.3m worth of receivables due within a year. So its liabilities total UK£20.8m more than the combination of its cash and short-term receivables.

K3 Business Technology Group has a market capitalization of UK£85.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since K3 Business Technology Group will need earnings to service that debt. 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.

In the last year K3 Business Technology Group had a loss before interest and tax, and actually shrunk its revenue by 3.1%, to UK£49m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months K3 Business Technology Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost UK£1.9m 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. We would feel better if it turned its trailing twelve month loss of UK£21m into a profit. So to be blunt we do 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 K3 Business Technology Group is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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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