Does Kongsberg Automotive (OB:KOA) Have A Healthy Balance Sheet?

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.' 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. We can see that Kongsberg Automotive ASA (OB:KOA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kongsberg Automotive

What Is Kongsberg Automotive's Debt?

The chart below, which you can click on for greater detail, shows that Kongsberg Automotive had €271.1m in debt in September 2020; about the same as the year before. However, it also had €70.8m in cash, and so its net debt is €200.3m.

A Look At Kongsberg Automotive's Liabilities

Zooming in on the latest balance sheet data, we can see that Kongsberg Automotive had liabilities of €219.9m due within 12 months and liabilities of €395.4m due beyond that. Offsetting this, it had €70.8m in cash and €265.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €279.1m.

When you consider that this deficiency exceeds the company's €260.9m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kongsberg Automotive's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Kongsberg Automotive made a loss at the EBIT level, and saw its revenue drop to €952m, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

While Kongsberg Automotive's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €5.3m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of €122m. In the meantime, we consider the stock to be 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. For instance, we've identified 3 warning signs for Kongsberg Automotive (2 don't sit too well with us) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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