Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Kontrol Energy Corp. (CNSX:KNR) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kontrol Energy

What Is Kontrol Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Kontrol Energy had CA$9.65m of debt, an increase on CA$5.88m, over one year. However, it does have CA$884.8k in cash offsetting this, leading to net debt of about CA$8.76m.

How Healthy Is Kontrol Energy's Balance Sheet?

According to the last reported balance sheet, Kontrol Energy had liabilities of CA$9.14m due within 12 months, and liabilities of CA$7.00m due beyond 12 months. Offsetting this, it had CA$884.8k in cash and CA$3.38m in receivables that were due within 12 months. So it has liabilities totalling CA$11.9m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CA$17.6m. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Kontrol Energy'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 Kontrol Energy managed to grow its revenue by 68%, to CA$14m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Kontrol Energy managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CA$762k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of-CA$2.2m. So we do think this stock is quite risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Kontrol Energy insider transactions.

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.

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