Kewal Kiran Clothing (NSE:KKCL) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Kewal Kiran Clothing Limited (NSE:KKCL) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kewal Kiran Clothing

How Much Debt Does Kewal Kiran Clothing Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Kewal Kiran Clothing had ₹641.1m of debt, an increase on ₹605.9m, over one year. But it also has ₹2.54b in cash to offset that, meaning it has ₹1.90b net cash.

How Strong Is Kewal Kiran Clothing's Balance Sheet?

We can see from the most recent balance sheet that Kewal Kiran Clothing had liabilities of ₹2.81b falling due within a year, and liabilities of ₹71.6m due beyond that. Offsetting this, it had ₹2.54b in cash and ₹1.54b in receivables that were due within 12 months. So it actually has ₹1.21b more liquid assets than total liabilities.

This surplus suggests that Kewal Kiran Clothing has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kewal Kiran Clothing has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Kewal Kiran Clothing grew its EBIT by 217% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Kewal Kiran Clothing 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. Over the last three years, Kewal Kiran Clothing recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kewal Kiran Clothing has net cash of ₹1.90b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹464m, being 84% of its EBIT. So we don't think Kewal Kiran Clothing's use of debt 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. We've identified 2 warning signs with Kewal Kiran Clothing , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.