Stock Analysis

These 4 Measures Indicate That KCP (NSE:KCP) Is Using Debt Reasonably Well

NSEI:KCP
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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 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. Importantly, The KCP Limited (NSE:KCP) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for KCP

What Is KCP's Debt?

The image below, which you can click on for greater detail, shows that KCP had debt of ₹4.66b at the end of March 2021, a reduction from ₹5.49b over a year. However, it also had ₹4.44b in cash, and so its net debt is ₹215.1m.

debt-equity-history-analysis
NSEI:KCP Debt to Equity History June 28th 2021

A Look At KCP's Liabilities

Zooming in on the latest balance sheet data, we can see that KCP had liabilities of ₹4.85b due within 12 months and liabilities of ₹4.34b due beyond that. On the other hand, it had cash of ₹4.44b and ₹1.31b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.44b.

Given KCP has a market capitalization of ₹17.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, KCP has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

KCP's net debt to EBITDA ratio is very low, at 0.054, suggesting the debt is only trivial. Although with EBIT only covering interest expenses 6.6 times over, the company is truly paying for borrowing. Even more impressive was the fact that KCP grew its EBIT by 219% 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 you can't view debt in total isolation; since KCP 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, KCP recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

The good news is that KCP's demonstrated ability to grow its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its net debt to EBITDA also supports that impression! Taking all this data into account, it seems to us that KCP takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with KCP .

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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