We Think Brd. Klee (CPH:KLEE B) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Brd. Klee A/S (CPH:KLEE B) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Brd. Klee

How Much Debt Does Brd. Klee Carry?

You can click the graphic below for the historical numbers, but it shows that Brd. Klee had kr.9.98m of debt in March 2021, down from kr.11.0m, one year before. But it also has kr.25.3m in cash to offset that, meaning it has kr.15.3m net cash.

How Healthy Is Brd. Klee's Balance Sheet?

According to the last reported balance sheet, Brd. Klee had liabilities of kr.28.7m due within 12 months, and liabilities of kr.13.9m due beyond 12 months. Offsetting this, it had kr.25.3m in cash and kr.33.8m in receivables that were due within 12 months. So it can boast kr.16.6m more liquid assets than total liabilities.

This surplus suggests that Brd. Klee has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Brd. Klee boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Brd. Klee grew its EBIT by 9.9% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is Brd. Klee's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Brd. Klee has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Brd. Klee produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Brd. Klee has kr.15.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of kr.25m, being 74% of its EBIT. So is Brd. Klee's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Brd. Klee (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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. 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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