Is Kewaunee Scientific (NASDAQ:KEQU) Weighed On By Its Debt Load?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Kewaunee Scientific Corporation (NASDAQ:KEQU) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kewaunee Scientific

What Is Kewaunee Scientific's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of January 2021 Kewaunee Scientific had US$4.49m of debt, an increase on US$4.02m, over one year. But on the other hand it also has US$5.56m in cash, leading to a US$1.07m net cash position.

A Look At Kewaunee Scientific's Liabilities

The latest balance sheet data shows that Kewaunee Scientific had liabilities of US$31.6m due within a year, and liabilities of US$19.7m falling due after that. Offsetting this, it had US$5.56m in cash and US$34.3m in receivables that were due within 12 months. So its liabilities total US$11.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Kewaunee Scientific is worth US$33.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Kewaunee Scientific boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kewaunee Scientific's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Kewaunee Scientific had a loss before interest and tax, and actually shrunk its revenue by 3.4%, to US$143m. We would much prefer see growth.

So How Risky Is Kewaunee Scientific?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Kewaunee Scientific had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$381k of cash and made a loss of US$1.8m. With only US$1.07m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For instance, we've identified 2 warning signs for Kewaunee Scientific (1 is a bit unpleasant) you should be aware of.

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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