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Is Korn Ferry (NYSE:KFY) A Risky Investment?

Simply Wall St

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Korn Ferry (NYSE:KFY) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. 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 Korn Ferry

How Much Debt Does Korn Ferry Carry?

The image below, which you can click on for greater detail, shows that at October 2019 Korn Ferry had debt of US$271.9m, up from US$224.6m in one year. However, its balance sheet shows it holds US$464.4m in cash, so it actually has US$192.6m net cash.

NYSE:KFY Historical Debt, February 6th 2020
NYSE:KFY Historical Debt, February 6th 2020

How Healthy Is Korn Ferry's Balance Sheet?

The latest balance sheet data shows that Korn Ferry had liabilities of US$450.5m due within a year, and liabilities of US$777.3m falling due after that. On the other hand, it had cash of US$464.4m and US$498.0m worth of receivables due within a year. So its liabilities total US$265.4m more than the combination of its cash and short-term receivables.

Given Korn Ferry has a market capitalization of US$2.33b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Korn Ferry also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Korn Ferry has increased its EBIT by 4.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Korn Ferry'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Korn Ferry 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, Korn Ferry recorded free cash flow worth 69% 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.

Summing up

While Korn Ferry does have more liabilities than liquid assets, it also has net cash of US$192.6m. And it impressed us with free cash flow of US$141m, being 69% of its EBIT. So we don't think Korn Ferry's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Korn Ferry, you may well want to click here to check an interactive graph of its earnings per share history.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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