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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Kellton Tech Solutions Limited (NSE:KELLTONTEC) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Kellton Tech Solutions
How Much Debt Does Kellton Tech Solutions Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Kellton Tech Solutions had ₹1.23b of debt, an increase on ₹989.8m, over one year. However, it also had ₹1.11b in cash, and so its net debt is ₹123.0m.
A Look At Kellton Tech Solutions's Liabilities
Zooming in on the latest balance sheet data, we can see that Kellton Tech Solutions had liabilities of ₹2.08b due within 12 months and liabilities of ₹622.6m due beyond that. On the other hand, it had cash of ₹1.11b and ₹1.80b worth of receivables due within a year. So it actually has ₹216.7m more liquid assets than total liabilities.
It's good to see that Kellton Tech Solutions has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
While Kellton Tech Solutions's low debt to EBITDA ratio of 0.11 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 5.7 last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. The bad news is that Kellton Tech Solutions saw its EBIT decline by 10% over the last year. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kellton Tech Solutions'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.