Is Kuehne + Nagel International (VTX:KNIN) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Kuehne + Nagel International AG (VTX:KNIN) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kuehne + Nagel International

What Is Kuehne + Nagel International's Debt?

The image below, which you can click on for greater detail, shows that Kuehne + Nagel International had debt of CHF204.0m at the end of September 2023, a reduction from CHF403.0m over a year. However, its balance sheet shows it holds CHF1.97b in cash, so it actually has CHF1.76b 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 CHF5.51b falling due within a year, and liabilities of CHF2.59b due beyond that. Offsetting this, it had CHF1.97b in cash and CHF4.35b in receivables that were due within 12 months. So it has liabilities totalling CHF1.79b more than its cash and near-term receivables, combined.

Given Kuehne + Nagel International has a humongous market capitalization of CHF31.3b, it's hard to believe these liabilities pose much 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!

The modesty of its debt load may become crucial for Kuehne + Nagel International if management cannot prevent a repeat of the 48% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Kuehne + Nagel International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Kuehne + Nagel International generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd 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 CHF1.76b. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in CHF2.3b. So we don't have any problem with Kuehne + Nagel International's use of debt. 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. We've identified 2 warning signs with Kuehne + Nagel International (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.