Is Kaspien Holdings (NASDAQ:KSPN) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Kaspien Holdings Inc. (NASDAQ:KSPN) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kaspien Holdings

How Much Debt Does Kaspien Holdings Carry?

The image below, which you can click on for greater detail, shows that Kaspien Holdings had debt of US$7.28m at the end of May 2021, a reduction from US$10.7m over a year. However, because it has a cash reserve of US$5.03m, its net debt is less, at about US$2.25m.

How Strong Is Kaspien Holdings' Balance Sheet?

We can see from the most recent balance sheet that Kaspien Holdings had liabilities of US$10.9m falling due within a year, and liabilities of US$23.3m due beyond that. On the other hand, it had cash of US$5.03m and US$3.11m worth of receivables due within a year. So its liabilities total US$26.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Kaspien Holdings has a market capitalization of US$49.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kaspien Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Kaspien Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to US$167m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Kaspien Holdings still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$1.4m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$11m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Kaspien Holdings (of which 2 are potentially serious!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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