Is Korn Ferry (NYSE:KFY) a risky investment?

Is Korn Ferry (NYSE:KFY) a risky investment?

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Korn ferry (NYSE:KFY) uses debt. But should shareholders worry about its use of debt?

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, 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 at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.

What is Korn Ferry’s debt?

The graph below, which you can click on for more details, shows that Korn Ferry had $395.5 million in debt as of April 2022; about the same as the previous year. However, he has $1.03 billion in cash to offset that, which translates to net cash of $629.8 million.

debt-equity-history-analysis
NYSE: KFY Debt to Equity July 23, 2022

How healthy is Korn Ferry’s balance sheet?

According to the last published balance sheet, Korn Ferry had liabilities of $984.2 million due within 12 months and liabilities of $930.7 million due beyond 12 months. In return, he had $1.03 billion in cash and $622.1 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $267.5 million.

Of course, Korn Ferry has a market capitalization of US$3.31 billion, so those liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate. Despite its notable liabilities, Korn Ferry has a net cash position, so it’s fair to say that it doesn’t have a lot of debt!

Even better, Korn Ferry increased its EBIT by 168% last year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Korn Ferry can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. Korn Ferry may have net cash on the balance sheet, but it is always interesting to see how well the business converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its needs and its capacity. . to manage debt. Over the past three years, Korn Ferry has recorded free cash flow of 97% of its EBIT, which is higher than what we would normally expect. This puts him in a very strong position to pay off the debt.

Summary

We can understand that investors are worried about Korn Ferry’s liabilities, but we can take comfort in the fact that it has a net cash position of $629.8 million. And it impressed us with free cash flow of $452 million, or 97% of its EBIT. We therefore do not believe that Korn Ferry’s use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 1 warning sign for Korn Ferry you should be aware.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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