Share Dilution

Does Kellton Tech Solutions (NSE: KELLTONTEC) have a healthy track record?


Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Mostly, Kellton Tech Solutions Limited (NSE: KELLTONTEC) is in debt. But should shareholders be worried about its use of debt?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. 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 Kellton Tech Solutions

What is the net debt of Kellton Tech Solutions?

The image below, which you can click for more details, shows that Kellton Tech Solutions had a debt of 1.01 billion yen at the end of March 2021, a reduction from 1.16 billion yen. over a year. However, it has 1.52 billion yen in cash to compensate for this, which leads to a net cash position of 508.1 million yen.

NSEI: KELLTONTEC History of debt to equity July 10, 2021

A look at the responsibilities of Kellton Tech Solutions

According to the latest published balance sheet, Kellton Tech Solutions had liabilities of 1.64 billion yen due within 12 months and liabilities of 470.5 million yen due beyond 12 months. On the other hand, he had 1.52 billion yen in cash and 2.06 billion yen in receivables due within a year. He can therefore claim 1.47 billion yen more in liquid assets than total Liabilities.

This surplus suggests that Kellton Tech Solutions is using debt in a way that seems both safe and prudent. Given that he has easily sufficient short-term liquidity, we don’t think he will have any problems with his lenders. Put simply, the fact that Kellton Tech Solutions has more cash than debt is arguably a good indication that it can safely manage its debt.

In contrast, Kellton Tech Solutions has seen its EBIT fall by 5.9% over the past twelve months. If profits continue to decline at this rate, the company may find it increasingly difficult to manage debt. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Kellton Tech Solutions will need revenue to repay this debt. 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. While Kellton Tech Solutions 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. Over the past three years, Kellton Tech Solutions has recorded free cash flow of 49% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.

In summary

While we agree with investors who find debt of concern, you should keep in mind that Kellton Tech Solutions has net cash of 508.1 million yen, as well as more liquid assets than cash. passive. So we have no problem with the use of debt by Kellton Tech Solutions. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 2 warning signs with Kellton Tech Solutions, 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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