These 4 Measures Indicate That K+S (ETR:SDF) Is Using Debt Reasonably Well

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.' 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 note that K+S Aktiengesellschaft (ETR:SDF) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for K+S

What Is K+S's Net Debt?

You can click the graphic below for the historical numbers, but it shows that K+S had €730.6m of debt in December 2022, down from €1.19b, one year before. However, its balance sheet shows it holds €985.8m in cash, so it actually has €255.2m net cash.

How Healthy Is K+S' Balance Sheet?

The latest balance sheet data shows that K+S had liabilities of €1.27b due within a year, and liabilities of €1.90b falling due after that. Offsetting this, it had €985.8m in cash and €1.21b in receivables that were due within 12 months. So it has liabilities totalling €973.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since K+S has a market capitalization of €3.46b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Better yet, K+S grew its EBIT by 316% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 K+S 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 two years, K+S's free cash flow amounted to 35% 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 €255.2m. And we liked the look of last year's 316% year-on-year EBIT growth. So we are not troubled with K+S's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with K+S (including 1 which is a bit unpleasant) .

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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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.