Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that KVH Industries, Inc. (NASDAQ:KVHI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is KVH Industries's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 KVH Industries had US$6.93m of debt, an increase on none, over one year. However, it does have US$40.7m in cash offsetting this, leading to net cash of US$33.7m.
How Strong Is KVH Industries' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that KVH Industries had liabilities of US$38.7m due within 12 months and liabilities of US$12.0m due beyond that. On the other hand, it had cash of US$40.7m and US$32.8m worth of receivables due within a year. So it actually has US$22.7m more liquid assets than total liabilities.
This short term liquidity is a sign that KVH Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that KVH Industries has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine KVH Industries's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year KVH Industries's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
So How Risky Is KVH Industries?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that KVH Industries had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$19m and booked a US$13m accounting loss. However, it has net cash of US$33.7m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 instance, we've identified 3 warning signs for KVH Industries that 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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