Is Kuehne + Nagel International (VTX:KNIN) A Risky Investment?

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.' 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. We can see that Kuehne + Nagel International AG (VTX:KNIN) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kuehne + Nagel International

How Much Debt Does Kuehne + Nagel International Carry?

As you can see below, Kuehne + Nagel International had CHF403.0m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has CHF2.95b in cash to offset that, meaning it has CHF2.54b net cash.

How Healthy Is Kuehne + Nagel International's Balance Sheet?

We can see from the most recent balance sheet that Kuehne + Nagel International had liabilities of CHF8.50b falling due within a year, and liabilities of CHF2.74b due beyond that. Offsetting these obligations, it had cash of CHF2.95b as well as receivables valued at CHF7.27b due within 12 months. So its liabilities total CHF1.02b more than the combination of its cash and short-term receivables.

Since publicly traded Kuehne + Nagel International shares are worth a very impressive total of CHF26.1b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Kuehne + Nagel International boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Kuehne + Nagel International grew its EBIT by 110% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kuehne + Nagel International 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kuehne + Nagel International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Kuehne + Nagel International recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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 CHF2.54b. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in CHF3.8b. So is Kuehne + Nagel International's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Kuehne + Nagel International (1 is significant) you should be aware of.

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.