New Zealand King Salmon Investments (NZSE:NZK) Is Making Moderate Use Of Debt

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. We can see that New Zealand King Salmon Investments Limited (NZSE:NZK) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for New Zealand King Salmon Investments

What Is New Zealand King Salmon Investments's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of January 2021 New Zealand King Salmon Investments had NZ$43.8m of debt, an increase on NZ$31.5m, over one year. However, it also had NZ$3.48m in cash, and so its net debt is NZ$40.3m.

How Healthy Is New Zealand King Salmon Investments' Balance Sheet?

The latest balance sheet data shows that New Zealand King Salmon Investments had liabilities of NZ$33.0m due within a year, and liabilities of NZ$62.5m falling due after that. Offsetting these obligations, it had cash of NZ$3.48m as well as receivables valued at NZ$13.5m due within 12 months. So its liabilities total NZ$78.5m more than the combination of its cash and short-term receivables.

New Zealand King Salmon Investments has a market capitalization of NZ$230.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if New Zealand King Salmon Investments 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.

Over 12 months, New Zealand King Salmon Investments made a loss at the EBIT level, and saw its revenue drop to NZ$163m, which is a fall of 2.1%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months New Zealand King Salmon Investments produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NZ$15m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NZ$11m of cash over the last year. So suffice it to say we do consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how New Zealand King Salmon Investments's profit, revenue, and operating cashflow have changed over the last few years.

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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