We Think New Zealand King Salmon Investments (NZSE:NZK) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, New Zealand King Salmon Investments Limited (NZSE:NZK) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for New Zealand King Salmon Investments

What Is New Zealand King Salmon Investments's Debt?

You can click the graphic below for the historical numbers, but it shows that New Zealand King Salmon Investments had NZ$3.50m of debt in July 2023, down from NZ$5.14m, one year before. But it also has NZ$28.7m in cash to offset that, meaning it has NZ$25.2m net cash.

A Look At New Zealand King Salmon Investments' Liabilities

The latest balance sheet data shows that New Zealand King Salmon Investments had liabilities of NZ$22.9m due within a year, and liabilities of NZ$10.9m falling due after that. Offsetting this, it had NZ$28.7m in cash and NZ$13.7m in receivables that were due within 12 months. So it can boast NZ$8.67m more liquid assets than total liabilities.

This short term liquidity is a sign that New Zealand King Salmon Investments could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, New Zealand King Salmon Investments boasts net cash, so it's fair to say it does not have a heavy debt load!

Although New Zealand King Salmon Investments made a loss at the EBIT level, last year, it was also good to see that it generated NZ$32m in EBIT over the last twelve months. 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 New Zealand King Salmon Investments's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. New Zealand King Salmon Investments 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. In the last year, New Zealand King Salmon Investments created free cash flow amounting to 16% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case New Zealand King Salmon Investments has NZ$25.2m in net cash and a decent-looking balance sheet. So we don't have any problem with New Zealand King Salmon Investments's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for New Zealand King Salmon Investments (of which 1 is significant!) you should know about.

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.