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 Kapston Facilities Management Limited (NSE:KAPSTON) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Kapston Facilities Management
What Is Kapston Facilities Management's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Kapston Facilities Management had debt of ₹254.9m, up from ₹216.5m in one year. On the flip side, it has ₹21.3m in cash leading to net debt of about ₹233.6m.
How Strong Is Kapston Facilities Management's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Kapston Facilities Management had liabilities of ₹362.3m due within 12 months and liabilities of ₹56.5m due beyond that. Offsetting this, it had ₹21.3m in cash and ₹488.6m in receivables that were due within 12 months. So it can boast ₹91.1m more liquid assets than total liabilities.
This surplus suggests that Kapston Facilities Management has a conservative balance sheet, and could probably eliminate its debt without much difficulty.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).