KSB (NSE:KSB) Has A Pretty Healthy Balance Sheet
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 KSB Limited (NSE:KSB) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.
View our latest analysis for KSB
What Is KSB's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 KSB had ₹481.0m of debt, an increase on ₹126.3m, over one year. However, its balance sheet shows it holds ₹2.13b in cash, so it actually has ₹1.65b net cash.
How Healthy Is KSB's Balance Sheet?
The latest balance sheet data shows that KSB had liabilities of ₹4.42b due within a year, and liabilities of ₹906.0m falling due after that. Offsetting these obligations, it had cash of ₹2.13b as well as receivables valued at ₹2.43b due within 12 months. So it has liabilities totalling ₹769.0m more than its cash and near-term receivables, combined.
Of course, KSB has a market capitalization of ₹20.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, KSB also has more cash than debt, so we're pretty confident it can manage its debt safely.
Another good sign is that KSB has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if KSB can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. KSB may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, KSB recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for and improvement.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that KSB has ₹1.6b in net cash. And we liked the look of last year's 26% year-on-year EBIT growth. So we are not troubled with KSB's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in KSB, you may well want to click here to check an interactive graph of its earnings per share history.
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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
