These 4 Measures Indicate That Kri-Kri Milk Industry (ATH:KRI) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Kri-Kri Milk Industry S.A. (ATH:KRI) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kri-Kri Milk Industry

How Much Debt Does Kri-Kri Milk Industry Carry?

The image below, which you can click on for greater detail, shows that Kri-Kri Milk Industry had debt of €5.93m at the end of September 2020, a reduction from €12.8m over a year. But it also has €6.50m in cash to offset that, meaning it has €572.0k net cash.

How Strong Is Kri-Kri Milk Industry's Balance Sheet?

We can see from the most recent balance sheet that Kri-Kri Milk Industry had liabilities of €23.5m falling due within a year, and liabilities of €15.5m due beyond that. On the other hand, it had cash of €6.50m and €30.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.09m.

This state of affairs indicates that Kri-Kri Milk Industry's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €212.9m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Kri-Kri Milk Industry also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Kri-Kri Milk Industry grew its EBIT at 11% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kri-Kri Milk Industry will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kri-Kri Milk Industry may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Kri-Kri Milk Industry's free cash flow amounted to 25% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Kri-Kri Milk Industry has €572.0k in net cash. And it also grew its EBIT by 11% over the last year. So we are not troubled with Kri-Kri Milk Industry's debt use. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Kri-Kri Milk Industry you should know about.

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.

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