Yahoo Finance Does K3 Business Technology Group (LON:KBT) Have A Healthy Balance Sheet?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that K3 Business Technology Group plc (LON:KBT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
See our latest analysis for K3 Business Technology Group
What Is K3 Business Technology Group's Net Debt?
As you can see below, K3 Business Technology Group had UK£1.90m of debt at May 2021, down from UK£19.8m a year prior. But it also has UK£6.30m in cash to offset that, meaning it has UK£4.39m net cash.
How Healthy Is K3 Business Technology Group's Balance Sheet?
According to the last reported balance sheet, K3 Business Technology Group had liabilities of UK£17.0m due within 12 months, and liabilities of UK£2.32m due beyond 12 months. Offsetting this, it had UK£6.30m in cash and UK£10.4m in receivables that were due within 12 months. So it has liabilities totalling UK£2.69m more than its cash and near-term receivables, combined.
Of course, K3 Business Technology Group has a market capitalization of UK£79.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, K3 Business Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since K3 Business Technology Group will need earnings to service that debt. 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.
In the last year K3 Business Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 8.1%, to UK£49m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is K3 Business Technology Group?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months K3 Business Technology 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£2.1m and booked a UK£24m accounting loss. Given it only has net cash of UK£4.39m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example K3 Business Technology Group has 2 warning signs (and 1 which is potentially serious) we think you should know about.
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.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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