Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Kennedy-Wilson Holdings, Inc. (NYSE:KW) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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.
What Is Kennedy-Wilson Holdings’s Debt?
As you can see below, at the end of March 2021, Kennedy-Wilson Holdings had US$5.51b of debt, up from US$4.80b a year ago. Click the image for more detail. On the flip side, it has US$1.44b in cash leading to net debt of about US$4.07b.
How Healthy Is Kennedy-Wilson Holdings’ Balance Sheet?
The latest balance sheet data shows that Kennedy-Wilson Holdings had liabilities of US$485.0m due within a year, and liabilities of US$5.52b falling due after that. Offsetting these obligations, it had cash of US$1.44b as well as receivables valued at US$190.0m due within 12 months. So it has liabilities totalling US$4.37b more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company’s US$3.05b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Kennedy-Wilson Holdings can strengthen its balance sheet over time.
In the last year Kennedy-Wilson Holdings had a loss before interest and tax, and actually shrunk its revenue by 25%, to US$473m. To be frank that doesn’t bode well.
Caveat Emptor
While Kennedy-Wilson Holdings’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$29m at the EBIT level. When we look at that alongside the significant liabilities, we’re not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$53m over the last twelve months. That means it’s on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it.