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 note that Kleos Space S.A. (ASX:KSS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Kleos Space Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Kleos Space had €3.46m of debt, an increase on €1.60m, over one year. But on the other hand it also has €10.8m in cash, leading to a €7.33m net cash position.
A Look At Kleos Space's Liabilities
According to the balance sheet data, Kleos Space had liabilities of €5.05m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of €10.8m as well as receivables valued at €192.0k due within 12 months. So it actually has €5.93m more liquid assets than total liabilities.
This surplus suggests that Kleos Space has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kleos Space has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Kleos Space'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.
While it hasn't made a profit, at least Kleos Space booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is Kleos Space?
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 Kleos Space lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €4.7m of cash and made a loss of €4.9m. With only €7.33m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 3 warning signs we've spotted with Kleos Space (including 2 which are significant) .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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