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.’ 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, Kaleyra, Inc. (NYSE:KLR) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Kaleyra’s Debt?
The image below, which you can click on for greater detail, shows that at June 2021 Kaleyra had debt of US$232.7m, up from US$48.2m in one year. However, it does have US$124.7m in cash offsetting this, leading to net debt of about US$108.0m.
How Healthy Is Kaleyra’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Kaleyra had liabilities of US$103.1m due within 12 months and liabilities of US$223.3m due beyond that. Offsetting this, it had US$124.7m in cash and US$80.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$120.7m.
Kaleyra has a market capitalization of US$489.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Kaleyra can strengthen its balance sheet over time.
Over 12 months, Kaleyra reported revenue of US$176m, which is a gain of 30%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Kaleyra managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost US$22m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn’t help that it burned through US$24m of cash over the last year. So to be blunt we think it is risky.