Over the past 12 months, the Kier (LSE: KIE) share price has declined by more than 86%, excluding dividends. Following this dip, shares in the construction and outsourcing group are dealing at a forward P/E of 2.3, which looks cheap at first glance.
However, while the stock might seem like an undervalued gem, I think there are some severe problems with the business that need to be resolved before investors should even consider adding this stock to their portfolio.
Cash is king
By far the most serious issue facing the business is, in my opinion, its lack of cash. For the financial year ending 30 June, the company reported a total cash outflow of nearly £150m. Granted, last year was a transition year for the group but, looking back over the past six years, cash generation has never been Kier’s strong point.
The firm’s financial statements show that between fiscals 2014-2019, it generated just under £480m of cash from operations, but spent £737m on Capex and acquisitions.
With so much cash flying out the door, it’s quite surprising Kier offered its investors a dividend. A total of £287m was paid out to investors between 2014 and 2019.
Looking at these figures, I’m not surprised Keir has run into problems. What’s more worrying is the fact it doesn’t actually seem to know how much money it owes to creditors.
Back in June, the company announced that due to an accounting error, its net debt was £50m higher at the end of December 2018 than previously reported. With confidence in the group at an all-time low, Kier can ill afford to make these mistakes.
The fact the company’s financial controls are so weak it doesn’t know how much money is owed to creditors is highly disconcerting. Investors need to know they can trust a firm’s financial statements when they are evaluating a business. If it doesn’t know it’s own numbers, what chance do investors have?
This is the primary reason why I’d avoid the Kier share price at all costs. While shares in the construction and outsourcing business might look cheap based on current City estimates, we just don’t know what’s lurking below the surface.
If the company discovers more discrepancies on its balance sheet, management could be forced to announce a surprise rights issue or, even worse, declare bankruptcy.
Not worth the risk
In my opinion, it’s just not worth taking on this risk. Kier’s turnaround is only just beginning, and the firm still has a lot of work to do before management can claim to have steadied the ship.
I would rather wait on the sidelines until it’s dealt with the worst of its problems and started to improve cash generation. That way, if the situation deteriorates, I won’t be left out of pocket.
In the meantime, there are plenty of other companies out there that seem to offer a much more attractive investment proposition.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.