Does Kudelski (VTX:KUD) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Kudelski SA (VTX:KUD) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kudelski

How Much Debt Does Kudelski Carry?

The image below, which you can click on for greater detail, shows that Kudelski had debt of US$259.9m at the end of June 2023, a reduction from US$393.6m over a year. However, because it has a cash reserve of US$95.7m, its net debt is less, at about US$164.2m.

How Healthy Is Kudelski's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kudelski had liabilities of US$355.3m due within 12 months and liabilities of US$285.4m due beyond that. Offsetting these obligations, it had cash of US$95.7m as well as receivables valued at US$144.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$400.1m.

This deficit casts a shadow over the US$90.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Kudelski would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kudelski can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Kudelski made a loss at the EBIT level, and saw its revenue drop to US$713m, which is a fall of 4.5%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Kudelski produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$1.6m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of US$31m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Kudelski (1 is a bit concerning!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.