Kekrops (ATH:KEKR) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Kekrops S.A. (ATH:KEKR) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kekrops

What Is Kekrops's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Kekrops had debt of €5.61m, up from €5.21m in one year. However, it also had €221.9k in cash, and so its net debt is €5.39m.

How Strong Is Kekrops' Balance Sheet?

The latest balance sheet data shows that Kekrops had liabilities of €3.87m due within a year, and liabilities of €4.94m falling due after that. Offsetting these obligations, it had cash of €221.9k as well as receivables valued at €34.8k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €8.55m.

While this might seem like a lot, it is not so bad since Kekrops has a market capitalization of €21.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kekrops 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.

Over 12 months, Kekrops reported revenue of €511k, which is a gain of 2,843%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate Kekrops's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost €963k at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €609k of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Kekrops (including 3 which are significant) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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