Australia markets close in 51 minutes
  • ALL ORDS

    7,331.50
    +23.80 (+0.33%)
     
  • ASX 200

    7,097.30
    +22.20 (+0.31%)
     
  • AUD/USD

    0.6888
    -0.0055 (-0.79%)
     
  • OIL

    108.33
    -2.16 (-1.95%)
     
  • GOLD

    1,806.50
    -1.70 (-0.09%)
     
  • BTC-AUD

    44,132.06
    +934.41 (+2.16%)
     
  • CMC Crypto 200

    682.64
    +1.53 (+0.22%)
     
  • AUD/EUR

    0.6617
    -0.0046 (-0.68%)
     
  • AUD/NZD

    1.1034
    -0.0004 (-0.04%)
     
  • NZX 50

    11,157.66
    -10.52 (-0.09%)
     
  • NASDAQ

    12,387.40
    +441.90 (+3.70%)
     
  • FTSE

    7,418.15
    +184.81 (+2.55%)
     
  • Dow Jones

    32,196.66
    +466.36 (+1.47%)
     
  • DAX

    14,027.93
    +288.33 (+2.10%)
     
  • Hang Seng

    19,828.71
    -70.06 (-0.35%)
     
  • NIKKEI 225

    26,574.19
    +146.54 (+0.55%)
     

Kingfisher (LON:KGF) Has A Pretty Healthy Balance Sheet

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·4-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Kingfisher plc (LON:KGF) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kingfisher

What Is Kingfisher's Debt?

As you can see below, Kingfisher had UK£113.0m of debt at July 2021, down from UK£635.0m a year prior. However, it does have UK£1.54b in cash offsetting this, leading to net cash of UK£1.42b.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Kingfisher's Liabilities

According to the last reported balance sheet, Kingfisher had liabilities of UK£3.58b due within 12 months, and liabilities of UK£2.40b due beyond 12 months. On the other hand, it had cash of UK£1.54b and UK£340.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£4.10b.

While this might seem like a lot, it is not so bad since Kingfisher has a market capitalization of UK£6.99b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Kingfisher boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Kingfisher has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Kingfisher can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kingfisher 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. Happily for any shareholders, Kingfisher actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Kingfisher's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£1.42b. And it impressed us with free cash flow of UK£1.0b, being 113% of its EBIT. So is Kingfisher's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Kingfisher (including 1 which is concerning) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting