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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Keppel Corporation Limited (SGX:BN4) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Keppel

How Much Debt Does Keppel Carry?

As you can see below, Keppel had S$10.4b of debt at June 2022, down from S$12.1b a year prior. However, it does have S$1.77b in cash offsetting this, leading to net debt of about S$8.66b.

A Look At Keppel's Liabilities

According to the last reported balance sheet, Keppel had liabilities of S$11.4b due within 12 months, and liabilities of S$7.62b due beyond 12 months. On the other hand, it had cash of S$1.77b and S$2.09b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$15.2b.

When you consider that this deficiency exceeds the company's S$12.8b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Keppel can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Keppel wasn't profitable at an EBIT level, but managed to grow its revenue by 45%, to S$9.1b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Keppel still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at S$164m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through S$597m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Keppel (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.