Kuehne + Nagel International (VTX:KNIN) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Kuehne + Nagel International AG (VTX:KNIN) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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

How Much Debt Does Kuehne + Nagel International Carry?

As you can see below, at the end of September 2024, Kuehne + Nagel International had CHF267.0m of debt, up from CHF204.0m a year ago. Click the image for more detail. However, it does have CHF926.0m in cash offsetting this, leading to net cash of CHF659.0m.

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

The latest balance sheet data shows that Kuehne + Nagel International had liabilities of CHF6.41b due within a year, and liabilities of CHF1.94b falling due after that. On the other hand, it had cash of CHF926.0m and CHF4.80b worth of receivables due within a year. So it has liabilities totalling CHF2.63b more than its cash and near-term receivables, combined.

Of course, Kuehne + Nagel International has a titanic market capitalization of CHF24.2b, so these liabilities are probably manageable. 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.

The modesty of its debt load may become crucial for Kuehne + Nagel International if management cannot prevent a repeat of the 31% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. During the last three years, Kuehne + Nagel International generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Kuehne + Nagel International's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CHF659.0m. And it impressed us with free cash flow of CHF1.1b, being 91% of its EBIT. So we are not troubled with Kuehne + Nagel International's debt use. 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 1 warning sign for Kuehne + Nagel International that you should be aware of.

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.