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 can see that Kimball International, Inc. (NASDAQ:KBAL) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Kimball International's Net Debt?
The image below, which you can click on for greater detail, shows that Kimball International had debt of US$161.0k at the end of June 2019, a reduction from US$184.0k over a year. However, its balance sheet shows it holds US$106.3m in cash, so it actually has US$106.1m net cash.
A Look At Kimball International's Liabilities
According to the last reported balance sheet, Kimball International had liabilities of US$133.1m due within 12 months, and liabilities of US$15.1m due beyond 12 months. On the other hand, it had cash of US$106.3m and US$63.1m worth of receivables due within a year. So it can boast US$21.2m more liquid assets than total liabilities.
This surplus suggests that Kimball International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kimball International boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Kimball International has increased its EBIT by 6.3% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kimball International'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kimball International 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. Over the most recent three years, Kimball International recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While we empathize with investors who find debt concerning, you should keep in mind that Kimball International has net cash of US$106m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$44m, being 78% of its EBIT. So is Kimball International's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Kimball International, you may well want to click here to check an interactive graph of its earnings per share history.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.