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Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that Kazan Organichesky Sintez Public Joint Stock Company (MCX: KZOS) has debt on its balance sheet. But does this debt worry shareholders?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Kazan Organichesky sintez
What is the net debt of Kazan Organichesky Sintez?
You can click on the graph below for the historical figures, but it shows that in June 2021, Kazan Organichesky Sintez had a debt of 890.0 million yen, an increase from none, year over year. However, his balance sheet shows that he holds 6.75 billion yen in cash, so he actually has net cash of 5.86 billion yen.
How strong is Kazan Organichesky sintez’s balance sheet?
The latest balance sheet data shows that Kazan Organichesky Sintez had 6.09 billion yen liabilities due within one year, and 3.31 billion yen liabilities due after that. On the other hand, he had 6.75 billion yen in cash and 2.52 billion yen in debts due within a year. Thus, its total liabilities correspond more or less perfectly to its short-term liquid assets.
This state of affairs indicates that Kazan Organichesky Sintez’s balance sheet looks quite strong, as its total liabilities roughly equal its cash. So the 182.8 billion yen company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. Despite her notable liabilities, Kazan Organhesky sintez has a net cash flow, so it’s fair to say that she doesn’t have a heavy debt load!
Even more impressive, Kazan Organhesky sintez increased its EBIT by 157% year over year. If sustained, this growth will make debt even more manageable in the years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Kazan Organichesky Sintez that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business can only repay its debts with hard cash, not with book profits. Although Kazan Organichesky sintez has net cash on his balance sheet, it is still worth examining his ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast he is building. (or erode) that cash balance. Over the past three years, Kazan Organhesky sintez’s free cash flow has amounted to 32% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.
In summary
While it is always a good idea to look at a company’s total liabilities, it is very reassuring that Kazan Organichesky sintez has 5.86 billion yen in net cash. And it impressed us with its EBIT growth of 157% over last year. So is Kazan Organichesky Sintez’s debt a risk? It does not seem to us. 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. To this end, you should inquire about the 2 warning signs we spotted with Kazan Organichesky sintez (including 1 that cannot be ignored).
If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.
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 material. Simply Wall St has no position in any of the stocks mentioned.
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