Here's Why Kewaunee Scientific (NASDAQ:KEQU) Can Afford Some Debt

Warren Buffett famously said, '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 Kewaunee Scientific Corporation (NASDAQ:KEQU) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Kewaunee Scientific

What Is Kewaunee Scientific's Net Debt?

The image below, which you can click on for greater detail, shows that at October 2020 Kewaunee Scientific had debt of US$7.59m, up from US$6.76m in one year. However, it also had US$5.76m in cash, and so its net debt is US$1.83m.

How Healthy Is Kewaunee Scientific's Balance Sheet?

The latest balance sheet data shows that Kewaunee Scientific had liabilities of US$33.9m due within a year, and liabilities of US$19.4m falling due after that. On the other hand, it had cash of US$5.76m and US$37.0m worth of receivables due within a year. So it has liabilities totalling US$10.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Kewaunee Scientific is worth US$29.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kewaunee Scientific's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Kewaunee Scientific saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Kewaunee Scientific had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$3.5m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$3.9m of cash over the last year. So suffice it to say we consider the stock very 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. For example, we've discovered 2 warning signs for Kewaunee Scientific (1 shouldn't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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