Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Mostly, Kogan.com Ltd (ASX: KGN) has debt. But the most important question is: what is the risk that this debt creates?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially large cap companies. The first thing to do when considering how much debt a business is using is to look at its cash flow and debt together.
Check out our latest review for Kogan.com
What is Kogan.com’s debt?
You can click on the graph below for the historical numbers, but it shows that as of December 2020, Kogan.com had A $ 2.71 million in debt, an increase of nil, year over year. However, he has A $ 79.0 million in cash, which translates into a net cash of A $ 76.2 million.
How strong is Kogan.com’s balance sheet?
The latest balance sheet data shows that Kogan.com had liabilities of A $ 206.8 million due within one year, and liabilities of A $ 9.64 million due thereafter. In return for these obligations, he had cash of A $ 79.0 million as well as receivables valued at A $ 7.45 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by A $ 130.1 million.
Given that Kogan.com’s publicly traded shares are worth a total of A $ 1.08 billion, it seems unlikely that this level of liabilities is a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. While it has some liabilities to note, Kogan.com also has more cash than debt, so we’re pretty confident it can handle its debt safely.
Best of all, Kogan.com increased its EBIT by 130% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Kogan.com’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, while the tax authorities love accounting profits, lenders only accept cash. While Kogan.com has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building. (or erode) that cash balance. Looking at the past three years, Kogan.com has recorded free cash flow of 28% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.
While Kogan.com’s balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has net cash of A $ 76.2 million. And he impressed us with his 130% EBIT growth over the past year. So is Kogan.com’s debt a risk? It does not seem to us. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 3 warning signs for Kogan.com (1 is significant) that you should be aware of.
If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then take a quick look at our list of net cash growth stocks.
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