These 4 Measures Indicate That Kuehne + Nagel International (VTX:KNIN) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Kuehne + Nagel International AG (VTX:KNIN) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 chart below, which you can click on for greater detail, shows that Kuehne + Nagel International had CHF405.0m in debt in December 2021; about the same as the year before. But on the other hand it also has CHF2.36b in cash, leading to a CHF1.96b net cash position.

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

The latest balance sheet data shows that Kuehne + Nagel International had liabilities of CHF8.32b due within a year, and liabilities of CHF3.12b falling due after that. Offsetting these obligations, it had cash of CHF2.36b as well as receivables valued at CHF7.18b due within 12 months. So it has liabilities totalling CHF1.90b more than its cash and near-term receivables, combined.

Given Kuehne + Nagel International has a humongous market capitalization of CHF33.4b, 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!

Even more impressive was the fact that Kuehne + Nagel International grew its EBIT by 181% 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'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. 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 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 CHF1.96b. And it impressed us with free cash flow of CHF2.3b, being 104% of its EBIT. So we don't think Kuehne + Nagel International's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Kuehne + Nagel International is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.