David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Kyndryl Holdings, Inc. (NYSE:KD) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Kyndryl Holdings
What Is Kyndryl Holdings's Debt?
As you can see below, Kyndryl Holdings had US$2.97b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$1.41b in cash offsetting this, leading to net debt of about US$1.56b.
A Look At Kyndryl Holdings' Liabilities
According to the last reported balance sheet, Kyndryl Holdings had liabilities of US$4.49b due within 12 months, and liabilities of US$5.00b due beyond 12 months. Offsetting these obligations, it had cash of US$1.41b as well as receivables valued at US$1.70b due within 12 months. So it has liabilities totalling US$6.38b more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's US$4.89b 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kyndryl Holdings 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 Kyndryl Holdings had a loss before interest and tax, and actually shrunk its revenue by 3.6%, to US$17b. That's not what we would hope to see.
Caveat Emptor
Importantly, Kyndryl Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$285m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$511m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. For riskier companies like Kyndryl Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.