Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Kekrops S.A. (ATH:KEKR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Kekrops's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2020 Kekrops had debt of €4.59m, up from €3.53m in one year. However, it does have €598.4k in cash offsetting this, leading to net debt of about €3.99m.
How Healthy Is Kekrops' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Kekrops had liabilities of €166.0k due within 12 months and liabilities of €4.89m due beyond that. On the other hand, it had cash of €598.4k and €1.07m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.38m.
Since publicly traded Kekrops shares are worth a total of €36.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kekrops 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.
Given it has no significant operating revenue at the moment, shareholders will be hoping Kekrops can make progress and gain better traction for the business, before it runs low on cash.
Over the last twelve months Kekrops produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €489k 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. Another cause for caution is that is bled €873k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Kekrops (of which 2 are concerning!) you should know about.
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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