Kuehne + Nagel International (VTX:KNIN) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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?

The chart below, which you can click on for greater detail, shows that Kuehne + Nagel International had CHF407.0m in debt in September 2021; about the same as the year before. But on the other hand it also has CHF1.59b in cash, leading to a CHF1.19b net cash position.

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 CHF6.97b falling due within a year, and liabilities of CHF3.31b due beyond that. Offsetting these obligations, it had cash of CHF1.59b as well as receivables valued at CHF6.21b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF2.48b.

Given Kuehne + Nagel International has a humongous market capitalization of CHF35.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 addition to that, we're happy to report that Kuehne + Nagel International has boosted its EBIT by 95%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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 actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 CHF1.19b. And it impressed us with free cash flow of CHF1.9b, being 109% of its EBIT. So we don't think Kuehne + Nagel International's use of debt is 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 2 warning signs for Kuehne + Nagel International (1 is a bit concerning!) 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.