Kyndryl Holdings (NYSE:KD) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Kyndryl Holdings, Inc. (NYSE:KD) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Kyndryl Holdings

How Much Debt Does Kyndryl Holdings Carry?

The chart below, which you can click on for greater detail, shows that Kyndryl Holdings had US$2.97b in debt in September 2023; about the same as the year before. However, it does have US$1.41b in cash offsetting this, leading to net debt of about US$1.56b.

A Look At Kyndryl Holdings' Liabilities

We can see from the most recent balance sheet that Kyndryl Holdings had liabilities of US$4.49b falling due within a year, and liabilities of US$5.00b due beyond that. Offsetting this, it had US$1.41b in cash and US$1.70b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.38b.

When you consider that this deficiency exceeds the company's US$4.84b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kyndryl Holdings'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.

In the last year Kyndryl Holdings had a loss before interest and tax, and actually shrunk its revenue by 3.6%, to US$17b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Kyndryl Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$285m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$511m over the last twelve months. That means it's on the risky side of things. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Kyndryl Holdings's profit, revenue, and operating cashflow have changed over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.