Here's Why Kuehne + Nagel International (VTX:KNIN) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Kuehne + Nagel International AG (VTX:KNIN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kuehne + Nagel International

How Much Debt Does Kuehne + Nagel International Carry?

As you can see below, Kuehne + Nagel International had CHF209.0m of debt at June 2023, down from CHF410.0m a year prior. But it also has CHF2.03b in cash to offset that, meaning it has CHF1.82b net cash.

A Look At Kuehne + Nagel International's Liabilities

We can see from the most recent balance sheet that Kuehne + Nagel International had liabilities of CHF6.32b falling due within a year, and liabilities of CHF2.53b due beyond that. On the other hand, it had cash of CHF2.03b and CHF4.57b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF2.24b.

Of course, Kuehne + Nagel International has a titanic market capitalization of CHF31.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Kuehne + Nagel International also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Kuehne + Nagel International's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kuehne + Nagel International's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Kuehne + Nagel International has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Kuehne + Nagel International recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Kuehne + Nagel International's liabilities, but we can be reassured by the fact it has has net cash of CHF1.82b. And it impressed us with free cash flow of CHF2.9b, being 97% of its EBIT. So we are not troubled with Kuehne + Nagel International's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Kuehne + Nagel International (1 shouldn't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.