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. As with many other companies Krynica Vitamin S.A. (WSE:KVT) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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, 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.
What Is Krynica Vitamin's Net Debt?
As you can see below, Krynica Vitamin had zł22.4m of debt at September 2020, down from zł48.7m a year prior. However, it does have zł30.2m in cash offsetting this, leading to net cash of zł7.78m.
A Look At Krynica Vitamin's Liabilities
The latest balance sheet data shows that Krynica Vitamin had liabilities of zł111.5m due within a year, and liabilities of zł35.8m falling due after that. Offsetting these obligations, it had cash of zł30.2m as well as receivables valued at zł67.0m due within 12 months. So it has liabilities totalling zł50.1m more than its cash and near-term receivables, combined.
Of course, Krynica Vitamin has a market capitalization of zł284.2m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Krynica Vitamin boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Krynica Vitamin grew its EBIT by 551% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Krynica Vitamin will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Krynica Vitamin 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. During the last three years, Krynica Vitamin produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Although Krynica Vitamin's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł7.78m. And we liked the look of last year's 551% year-on-year EBIT growth. So is Krynica Vitamin's debt a risk? It doesn't seem so to us. 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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Krynica Vitamin you should know about.
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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