Is Kongsberg Gruppen (OB:KOG) A Risky Investment?

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. We note that Kongsberg Gruppen ASA (OB:KOG) 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 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Kongsberg Gruppen

What Is Kongsberg Gruppen's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Kongsberg Gruppen had debt of kr3.00b, up from kr2.45b in one year. However, its balance sheet shows it holds kr5.98b in cash, so it actually has kr2.98b net cash.

A Look At Kongsberg Gruppen's Liabilities

The latest balance sheet data shows that Kongsberg Gruppen had liabilities of kr30.7b due within a year, and liabilities of kr6.07b falling due after that. On the other hand, it had cash of kr5.98b and kr20.2b worth of receivables due within a year. So it has liabilities totalling kr10.6b more than its cash and near-term receivables, combined.

Of course, Kongsberg Gruppen has a titanic market capitalization of kr131.4b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Kongsberg Gruppen boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Kongsberg Gruppen grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kongsberg Gruppen'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, a company can only pay off debt with cold hard cash, not accounting profits. While Kongsberg Gruppen 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. Over the most recent three years, Kongsberg Gruppen recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Kongsberg Gruppen has kr2.98b in net cash. And we liked the look of last year's 39% year-on-year EBIT growth. So is Kongsberg Gruppen's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Kongsberg Gruppen's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.