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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Kromek Group plc (LON:KMK) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.
See our latest analysis for Kromek Group
What Is Kromek Group's Debt?
As you can see below, Kromek Group had UK£6.79m of debt at October 2021, down from UK£7.58m a year prior. However, its balance sheet shows it holds UK£10.2m in cash, so it actually has UK£3.45m net cash.
How Healthy Is Kromek Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Kromek Group had liabilities of UK£11.2m due within 12 months and liabilities of UK£7.31m due beyond that. On the other hand, it had cash of UK£10.2m and UK£7.59m worth of receivables due within a year. So it has liabilities totalling UK£639.0k more than its cash and near-term receivables, combined.
Having regard to Kromek Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the UK£46.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Kromek Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kromek Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.