We Think KONE Oyj (HEL:KNEBV) Can Manage Its Debt With Ease

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies KONE Oyj (HEL:KNEBV) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KONE Oyj

What Is KONE Oyj's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 KONE Oyj had debt of €218.2m, up from €206.6m in one year. However, its balance sheet shows it holds €1.33b in cash, so it actually has €1.11b net cash.

How Strong Is KONE Oyj's Balance Sheet?

We can see from the most recent balance sheet that KONE Oyj had liabilities of €5.29b falling due within a year, and liabilities of €893.7m due beyond that. On the other hand, it had cash of €1.33b and €2.68b worth of receivables due within a year. So its liabilities total €2.18b more than the combination of its cash and short-term receivables.

Of course, KONE Oyj has a titanic market capitalization of €22.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, KONE Oyj boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that KONE Oyj grew its EBIT by 18% last year, making its debt load easier to handle. 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 KONE Oyj'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. KONE Oyj 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. During the last three years, KONE Oyj generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about KONE Oyj's liabilities, but we can be reassured by the fact it has has net cash of €1.11b. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in €679m. So we don't think KONE Oyj's use of debt is risky. 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. Be aware that KONE Oyj is showing 2 warning signs in our investment analysis , you should know about...

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.