K+S (ETR:SDF) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that K+S Aktiengesellschaft (ETR:SDF) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for K+S

What Is K+S's Net Debt?

The image below, which you can click on for greater detail, shows that K+S had debt of €327.7m at the end of March 2023, a reduction from €1.13b over a year. However, it does have €814.7m in cash offsetting this, leading to net cash of €487.0m.

A Look At K+S' Liabilities

The latest balance sheet data shows that K+S had liabilities of €799.7m due within a year, and liabilities of €2.00b falling due after that. Offsetting this, it had €814.7m in cash and €1.15b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €837.7m.

This deficit isn't so bad because K+S is worth €3.30b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, K+S also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that K+S grew its EBIT by 192% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine K+S's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. K+S 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, K+S's free cash flow amounted to 26% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although K+S's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €487.0m. And it impressed us with its EBIT growth of 192% over the last year. So we are not troubled with K+S's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with K+S (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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. 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.