We Think Kewal Kiran Clothing (NSE:KKCL) Can Manage Its Debt With Ease

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.' 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 Kewal Kiran Clothing Limited (NSE:KKCL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kewal Kiran Clothing

What Is Kewal Kiran Clothing's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kewal Kiran Clothing had ₹670.1m of debt in September 2021, down from ₹791.5m, one year before. But it also has ₹2.90b in cash to offset that, meaning it has ₹2.23b net cash.

How Healthy Is Kewal Kiran Clothing's Balance Sheet?

The latest balance sheet data shows that Kewal Kiran Clothing had liabilities of ₹2.26b due within a year, and liabilities of ₹48.7m falling due after that. On the other hand, it had cash of ₹2.90b and ₹1.96b worth of receivables due within a year. So it actually has ₹2.55b 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!

Even more impressive was the fact that Kewal Kiran Clothing grew its EBIT by 141% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Kewal Kiran Clothing produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Kewal Kiran Clothing has ₹2.23b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 141% over the last year. So is Kewal Kiran Clothing's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Kewal Kiran Clothing has 3 warning signs we think you should be aware of.

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.