Is Kellton Tech Solutions (NSE:KELLTONTEC) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Kellton Tech Solutions Limited (NSE:KELLTONTEC) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kellton Tech Solutions

What Is Kellton Tech Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that Kellton Tech Solutions had debt of ₹1.16b at the end of September 2020, a reduction from ₹1.47b over a year. However, its balance sheet shows it holds ₹1.36b in cash, so it actually has ₹207.7m net cash.

A Look At Kellton Tech Solutions' Liabilities

The latest balance sheet data shows that Kellton Tech Solutions had liabilities of ₹1.72b due within a year, and liabilities of ₹799.2m falling due after that. Offsetting this, it had ₹1.36b in cash and ₹2.04b in receivables that were due within 12 months. So it actually has ₹880.2m more liquid assets than total liabilities.

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

On the other hand, Kellton Tech Solutions's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is Kellton Tech Solutions's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Kellton Tech Solutions 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. Looking at the most recent three years, Kellton Tech Solutions recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Kellton Tech Solutions has net cash of ₹207.7m, as well as more liquid assets than liabilities. So we don't have any problem with Kellton Tech Solutions's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Kellton Tech Solutions .

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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