Kindred Group (STO:KIND SDB) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Kindred Group plc (STO:KIND SDB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kindred Group

What Is Kindred Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Kindred Group had UK£118.3m of debt in December 2020, down from UK£225.4m, one year before. However, it does have UK£300.5m in cash offsetting this, leading to net cash of UK£182.2m.

A Look At Kindred Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Kindred Group had liabilities of UK£405.8m due within 12 months and liabilities of UK£174.4m due beyond that. Offsetting these obligations, it had cash of UK£300.5m as well as receivables valued at UK£113.1m due within 12 months. So it has liabilities totalling UK£166.6m more than its cash and near-term receivables, combined.

Of course, Kindred Group has a market capitalization of UK£2.70b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Kindred Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Kindred Group grew its EBIT by 191% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kindred Group'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Kindred Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Kindred Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Kindred Group's liabilities, but we can be reassured by the fact it has has net cash of UK£182.2m. And it impressed us with free cash flow of UK£290m, being 106% of its EBIT. So we don't think Kindred Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Kindred Group is showing 3 warning signs in our investment analysis , you should know about...

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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