KSB SE KGaA (ETR:KSB) Has A Pretty Healthy Balance Sheet

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.' 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. Importantly, KSB SE & Co. KGaA (ETR:KSB) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for KSB SE KGaA

How Much Debt Does KSB SE KGaA Carry?

The image below, which you can click on for greater detail, shows that KSB SE KGaA had debt of €43.6m at the end of December 2020, a reduction from €53.1m over a year. However, it does have €331.5m in cash offsetting this, leading to net cash of €288.0m.

A Look At KSB SE KGaA's Liabilities

We can see from the most recent balance sheet that KSB SE KGaA had liabilities of €689.2m falling due within a year, and liabilities of €746.9m due beyond that. On the other hand, it had cash of €331.5m and €631.3m worth of receivables due within a year. So its liabilities total €473.4m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €598.6m, so it does suggest shareholders should keep an eye on KSB SE KGaA's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, KSB SE KGaA boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that KSB SE KGaA has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine KSB SE KGaA's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. KSB SE KGaA 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 most recent three years, KSB SE KGaA recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While KSB SE KGaA does have more liabilities than liquid assets, it also has net cash of €288.0m. So we don't have any problem with KSB SE KGaA's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with KSB SE KGaA .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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