David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Kingspan plc group (ISE: KRX) is in debt. But does this debt concern shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Kingspan Group
How much debt does the Kingspan Group have?
You can click on the graph below for historical figures, but it shows that as of June 2021, Kingspan Group had 1.55 billion euros in debt, an increase from 902.6 million euros, over a year. However, it has € 931.5 million in cash offsetting this, which leads to net debt of around € 619.9 million.
How strong is the Kingspan Group’s balance sheet?
The latest balance sheet data shows Kingspan Group had debt of € 1.73 billion due within one year, and debt of € 1.75 billion due thereafter. In return, he had € 931.5 million in cash and € 1.24 billion in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its (short-term) receivables by 1.31 billion euros.
Of course, Kingspan Group has a titanic market cap of € 17.6 billion, so this liability is likely manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Kingspan Group’s net debt is only 0.84 times its EBITDA. And its EBIT easily covers its interest costs, being 20.0 times greater. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, Kingspan Group has increased its EBIT by 38% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Kingspan Group can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Kingspan Group has generated free cash flow of 84% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.
Our point of view
Kingspan Group’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And this is only the beginning of good news as its conversion from EBIT to free cash flow is also very encouraging. It seems Kingspan Group has no trouble standing on its own, and it has no reason to fear its lenders. In our opinion, he has a healthy and happy track record. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 1 warning sign with Kingspan Group, and understanding them should be part of your investment process.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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