These 4 Measures Indicate That Eastman Kodak (NYSE:KODK) Is Using Debt Extensively

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. We can see that Eastman Kodak Company (NYSE:KODK) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Eastman Kodak

How Much Debt Does Eastman Kodak Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Eastman Kodak had US$257.0m of debt, an increase on US$244.0m, over one year. But on the other hand it also has US$309.0m in cash, leading to a US$52.0m net cash position.

How Strong Is Eastman Kodak's Balance Sheet?

According to the last reported balance sheet, Eastman Kodak had liabilities of US$334.0m due within 12 months, and liabilities of US$873.0m due beyond 12 months. Offsetting these obligations, it had cash of US$309.0m as well as receivables valued at US$185.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$713.0m.

This deficit casts a shadow over the US$364.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Eastman Kodak would likely require a major re-capitalisation if it had to pay its creditors today. Given that Eastman Kodak has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Importantly, Eastman Kodak grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Eastman Kodak will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Eastman Kodak may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Eastman Kodak burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

Although Eastman Kodak's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$52.0m. And it impressed us with its EBIT growth of 53% over the last year. Despite its cash we think that Eastman Kodak seems to struggle to handle its total liabilities, so we are wary of the stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Eastman Kodak has 1 warning sign we think you should be aware of.

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.