Is Koenig & Bauer (ETR:SKB) Using Debt In A Risky Way?

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 Koenig & Bauer AG (ETR:SKB) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Koenig & Bauer

What Is Koenig & Bauer's Debt?

The image below, which you can click on for greater detail, shows that Koenig & Bauer had debt of €131.7m at the end of June 2021, a reduction from €221.5m over a year. However, because it has a cash reserve of €99.0m, its net debt is less, at about €32.7m.

A Look At Koenig & Bauer's Liabilities

Zooming in on the latest balance sheet data, we can see that Koenig & Bauer had liabilities of €502.7m due within 12 months and liabilities of €411.3m due beyond that. Offsetting these obligations, it had cash of €99.0m as well as receivables valued at €111.8m due within 12 months. So it has liabilities totalling €703.2m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €475.9m 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. 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 Koenig & Bauer'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.

Over 12 months, Koenig & Bauer made a loss at the EBIT level, and saw its revenue drop to €1.0b, which is a fall of 20%. We would much prefer see growth.

Caveat Emptor

Not only did Koenig & Bauer's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €55m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of €78m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Koenig & Bauer's profit, revenue, and operating cashflow have changed over the last few years.

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.

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.

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