KSB SE KGaA (ETR:KSB) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that KSB SE & Co. KGaA (ETR:KSB) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for KSB SE KGaA

What Is KSB SE KGaA's Net Debt?

As you can see below, KSB SE KGaA had €11.1m of debt at June 2023, down from €43.6m a year prior. However, it does have €199.9m in cash offsetting this, leading to net cash of €188.8m.

A Look At KSB SE KGaA's Liabilities

According to the last reported balance sheet, KSB SE KGaA had liabilities of €895.1m due within 12 months, and liabilities of €511.8m due beyond 12 months. Offsetting these obligations, it had cash of €199.9m as well as receivables valued at €800.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €406.7m.

This deficit isn't so bad because KSB SE KGaA is worth €1.04b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, KSB SE KGaA boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that KSB SE KGaA has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. 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 KSB SE KGaA 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. 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. In the last three years, KSB SE KGaA created free cash flow amounting to 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While KSB SE KGaA does have more liabilities than liquid assets, it also has net cash of €188.8m. And it impressed us with its EBIT growth of 58% over the last year. So we don't have any problem with KSB SE KGaA's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for KSB SE KGaA that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.