These 4 Measures Indicate That Kaynes Technology India (NSE:KAYNES) Is Using Debt Reasonably Well

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.' 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. Importantly, Kaynes Technology India Limited (NSE:KAYNES) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kaynes Technology India

What Is Kaynes Technology India's Debt?

As you can see below, at the end of March 2024, Kaynes Technology India had ₹3.06b of debt, up from ₹1.36b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹15.3b in cash, so it actually has ₹12.2b net cash.

How Healthy Is Kaynes Technology India's Balance Sheet?

We can see from the most recent balance sheet that Kaynes Technology India had liabilities of ₹7.36b falling due within a year, and liabilities of ₹404.8m due beyond that. On the other hand, it had cash of ₹15.3b and ₹3.85b worth of receivables due within a year. So it can boast ₹11.3b more liquid assets than total liabilities.

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

It is well worth noting that Kaynes Technology India's EBIT shot up like bamboo after rain, gaining 53% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kaynes Technology India can strengthen its balance sheet over time. 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. Kaynes Technology India 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, Kaynes Technology India saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Kaynes Technology India has ₹12.2b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 53% over the last year. So we don't have any problem with Kaynes Technology India's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with Kaynes Technology India (including 2 which can't be ignored) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com