Here’s Why Kanani Industries (NSE: KANANIIND) Can Responsibly Manage Debt
Warren Buffett said: “Volatility is far from synonymous with risk”. 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. Above all, Kanani Industries Limited (NSE: KANANIIND) is in debt. But does this debt worry shareholders?
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. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest analysis for Kanani Industries
What is the debt of Kanani Industries?
You can click on the chart below for historical figures, but it shows that Kanani Industries had 200.0 million yen in debt in September 2021, down from 302.6 million yen a year earlier. On the other hand, it has 47.2 million euros of liquidity leading to a net debt of about 152.8 million euros.
A look at the responsibilities of Kanani Industries
According to balance sheet data, Kanani Industries had a liability of 757.5 million yen due within 12 months, but no longer a term liability. In return, he had 47.2 million yen in cash and 1.13 billion yen in receivables due within 12 months. So it actually has 420.3m Following liquid assets as total liabilities.
This surplus suggests that Kanani Industries is using debt in a way that seems both safe and conservative. Because he has a lot of assets, he is unlikely to have any problems with his lenders.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Kanani Industries shareholders are faced with the double whammy of a high net debt / EBITDA ratio (16.2) and relatively low interest coverage, since EBIT is only 0.98 times expenses of interest. The debt burden here is considerable. Worse yet, Kanani Industries has seen its EBIT reach 48% over the past 12 months. If profits continue to follow this path, it will be more difficult to pay off this debt than to convince us to run a marathon in the rain. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; since Kanani Industries will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Fortunately for all shareholders, Kanani Industries has actually generated more free cash flow than EBIT over the past three years. This kind of cash conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
We were not impressed with Kanani Industries’ interest coverage and its EBIT growth rate made us cautious. But like a ballerina finishing on a perfect spin, she has no trouble converting her EBIT into free cash flow. Looking at all of this data, we feel a little cautious about Kanani Industries’ debt levels. While debt has its advantage in potential higher returns, we believe shareholders should definitely consider how leverage levels might make the stock riskier. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example – Kanani Industries has 3 warning signs we think you should be aware.
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.
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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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.