Is Kewal Kiran Clothing (NSE:KKCL) A Risky Investment?

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.' 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. Importantly, Kewal Kiran Clothing Limited (NSE:KKCL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kewal Kiran Clothing

How Much Debt Does Kewal Kiran Clothing Carry?

The image below, which you can click on for greater detail, shows that Kewal Kiran Clothing had debt of ₹347.2m at the end of December 2020, a reduction from ₹872.7m over a year. But on the other hand it also has ₹2.60b in cash, leading to a ₹2.25b net cash position.

A Look At Kewal Kiran Clothing's Liabilities

Zooming in on the latest balance sheet data, we can see that Kewal Kiran Clothing had liabilities of ₹1.15b due within 12 months and liabilities of ₹58.2m due beyond that. Offsetting this, it had ₹2.60b in cash and ₹1.25b in receivables that were due within 12 months. So it actually has ₹2.65b more liquid assets than total liabilities.

It's good to see that Kewal Kiran Clothing has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Kewal Kiran Clothing boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Kewal Kiran Clothing's EBIT was down 74% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kewal Kiran Clothing's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Kewal Kiran Clothing has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Kewal Kiran Clothing recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Kewal Kiran Clothing has ₹2.25b in net cash and a decent-looking balance sheet. So we don't have any problem with Kewal Kiran Clothing's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Kewal Kiran Clothing that you should be aware of.

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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This article by Simply Wall St is general in nature. 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.
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