Is Klöckner & Co (ETR:KCO) Using Debt Sensibly?

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.' 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 Klöckner & Co SE (ETR:KCO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Klöckner & Co

What Is Klöckner & Co's Debt?

As you can see below, Klöckner & Co had €359.7m of debt at September 2020, down from €757.8m a year prior. However, it does have €138.5m in cash offsetting this, leading to net debt of about €221.2m.

How Healthy Is Klöckner & Co's Balance Sheet?

We can see from the most recent balance sheet that Klöckner & Co had liabilities of €999.7m falling due within a year, and liabilities of €654.0m due beyond that. On the other hand, it had cash of €138.5m and €737.8m worth of receivables due within a year. So it has liabilities totalling €777.4m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €766.6m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Klöckner & Co 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.

In the last year Klöckner & Co had a loss before interest and tax, and actually shrunk its revenue by 20%, to €5.3b. We would much prefer see growth.

Caveat Emptor

While Klöckner & Co's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €131m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of €188m. And until that time we think this is a risky stock. 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. For example, we've discovered 1 warning sign for Klöckner & Co that you should be aware of before investing here.

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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