We Think Kambi Group (STO:KAMBI) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Kambi Group plc (STO:KAMBI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kambi Group

How Much Debt Does Kambi Group Carry?

As you can see below, Kambi Group had €7.38m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has €91.9m in cash, leading to a €84.5m net cash position.

How Healthy Is Kambi Group's Balance Sheet?

According to the last reported balance sheet, Kambi Group had liabilities of €28.3m due within 12 months, and liabilities of €21.4m due beyond 12 months. On the other hand, it had cash of €91.9m and €33.6m worth of receivables due within a year. So it actually has €75.9m more liquid assets than total liabilities.

This surplus suggests that Kambi Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kambi Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Kambi Group grew its EBIT by 393% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Kambi Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Kambi Group 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 most recent three years, Kambi Group recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Kambi Group has €84.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 393% over the last year. So is Kambi Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Kambi Group that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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