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. 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 Kromek Group plc (LON:KMK) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Kromek Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of October 2019 Kromek Group had UK£5.76m of debt, an increase on UK£5.5, over one year. However, its balance sheet shows it holds UK£13.4m in cash, so it actually has UK£7.67m net cash.
How Strong Is Kromek Group's Balance Sheet?
According to the last reported balance sheet, Kromek Group had liabilities of UK£9.25m due within 12 months, and liabilities of UK£5.97m due beyond 12 months. Offsetting these obligations, it had cash of UK£13.4m as well as receivables valued at UK£21.3m due within 12 months. So it can boast UK£19.6m more liquid assets than total liabilities.
This excess liquidity suggests that Kromek Group is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Kromek Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Kromek Group'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 Kromek Group wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to UK£16m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Kromek Group?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Kromek Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of UK£13m and booked a UK£894k accounting loss. But at least it has UK£7.67m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Kromek Group may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Kromek Group is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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. Thank you for reading.