Warren Buffett famously said, '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. Importantly, KVH Industries, Inc. (NASDAQ:KVHI) 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 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, 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. 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 KVH Industries Carry?
As you can see below, KVH Industries had US$2.00m of debt at June 2019, down from US$46.4m a year prior. However, its balance sheet shows it holds US$65.4m in cash, so it actually has US$63.4m net cash.
How Healthy Is KVH Industries's Balance Sheet?
The latest balance sheet data shows that KVH Industries had liabilities of US$50.6m due within a year, and liabilities of US$16.3m falling due after that. On the other hand, it had cash of US$65.4m and US$33.4m worth of receivables due within a year. So it actually has US$31.9m more liquid assets than total liabilities.
It's good to see that KVH Industries has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, KVH Industries boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by12%, to US$172m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is KVH Industries?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year KVH Industries had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$15m and booked a US$11m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$63.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. For riskier companies like KVH Industries I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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