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Is Kingsgate Consolidated (ASX:KCN) A Risky Investment?

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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.' 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. We can see that Kingsgate Consolidated Limited (ASX:KCN) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kingsgate Consolidated

How Much Debt Does Kingsgate Consolidated Carry?

As you can see below, Kingsgate Consolidated had AU$11.5m of debt at December 2020, down from AU$12.7m a year prior. But it also has AU$15.3m in cash to offset that, meaning it has AU$3.78m net cash.

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

How Healthy Is Kingsgate Consolidated's Balance Sheet?

We can see from the most recent balance sheet that Kingsgate Consolidated had liabilities of AU$2.72m falling due within a year, and liabilities of AU$33.4m due beyond that. Offsetting this, it had AU$15.3m in cash and AU$286.0k in receivables that were due within 12 months. So it has liabilities totalling AU$20.6m more than its cash and near-term receivables, combined.

Since publicly traded Kingsgate Consolidated shares are worth a total of AU$201.9m, it seems unlikely that this level of liabilities would be a major threat. 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, Kingsgate Consolidated also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kingsgate Consolidated will need earnings to service that debt. 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.

In the last year Kingsgate Consolidated managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Kingsgate Consolidated?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Kingsgate Consolidated lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$8.6m and booked a AU$17m accounting loss. Given it only has net cash of AU$3.78m, the company may need to raise more capital if it doesn't reach break-even soon. Kingsgate Consolidated's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Kingsgate Consolidated I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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. 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.

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

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