Kelly Partners appears to have increasing debt year on year and increasing liabilities. Can someone much smarter and more balance sheet savvy than me she'd some light? Is this something I should be worried about or is there some accountant wizardry going on?
The biggest problem I can see is their debt / equity ratio is at a very elevated 122% and is forecast to be 275% at FY22 year end. With interest rates rising one has to query their ability to service debt. Operating cash flow at the end of FY21 was $15.1m (which is the highest level in the last 5 years). Investing cash flow for the last five years has averaged $4.2m over the last 5 years. This leaves just $10.9m of free cash flow to fund debt. With equity at $30m and assuming the forecast debt / equity ratio is correct, debt is forecast to increase to $82.5m by June 2022. This is just over 7.5 times free cash flow which is far too high.
These are just quick back of the envelope numbers and I haven’t gone into interest rates and the company’s ability to service these and if they have fixed their rates or if they subject to interest rate fluctuations.
Not one I would get into based upon this quick analysis.
KPG getting absolutely punished in the market at the moment. Down 30% in the past few weeks. Any thoughts on why? They seemed to hold off the big sell offs earlier in the year, is it just the market catching up with them?
Only significant announcement was the extraordinary GM being called, but it looks that is just to provide some financial assistance to a subsidiary, which is not big figures compared to their total debt level, unless I misunderstood the announcement.
Looking at the accounts does make me very nervous, I think they are going to feel the pinch of aggressive acquisitions while also trying to maintain this monthly dividend policy (in my opinion this is being driven by Brett Kelly wanting to make hay while the sun shines without having to sell shares and hurt the stock), you can't have it both ways forever. You cannot really drive organic growth in these small firms, and employee retention has been a big issue for them which drives up costs, slows the turnover of work (hurting their lockup days) and eventually hits the bottom line.
They were at some VERY lofty valuations at over $5, so I am not surprised to see it come back down, it just appears to have been very swift and sharp on the back of minimal news.
Would love to hear some more informed opinions!
Great points on the debt @Scott. Worth noting that no debt is held by the parent company and is quaranteened within each individual practice. And there's a wide diversity in practices. Makes it a lot less risky than it otherwise would be, but i definitely note your point.