Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Kewaunee Scientific Corporation (NASDAQ:KEQU) makes use of debt. But the real question is whether this debt is making the company risky.
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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Kewaunee Scientific Carry?
The image below, which you can click on for greater detail, shows that at January 2021 Kewaunee Scientific had debt of US$4.49m, up from US$4.02m in one year. However, its balance sheet shows it holds US$5.56m in cash, so it actually has US$1.07m net cash.
How Strong Is Kewaunee Scientific's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Kewaunee Scientific had liabilities of US$31.6m due within 12 months and liabilities of US$19.7m due beyond that. On the other hand, it had cash of US$5.56m and US$34.3m worth of receivables due within a year. So it has liabilities totalling US$11.5m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Kewaunee Scientific is worth US$33.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Kewaunee Scientific boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Kewaunee Scientific'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.
Over 12 months, Kewaunee Scientific made a loss at the EBIT level, and saw its revenue drop to US$143m, which is a fall of 3.4%. We would much prefer see growth.
So How Risky Is Kewaunee Scientific?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Kewaunee Scientific had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$381k and booked a US$1.8m accounting loss. Given it only has net cash of US$1.07m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Kewaunee Scientific has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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.
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. 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.
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