Is Kongsberg Gruppen (OB:KOG) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Kongsberg Gruppen ASA (OB:KOG) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kongsberg Gruppen

How Much Debt Does Kongsberg Gruppen Carry?

As you can see below, Kongsberg Gruppen had kr2.96b of debt at June 2021, down from kr3.55b a year prior. But on the other hand it also has kr5.79b in cash, leading to a kr2.84b net cash position.

A Look At Kongsberg Gruppen's Liabilities

According to the last reported balance sheet, Kongsberg Gruppen had liabilities of kr17.9b due within 12 months, and liabilities of kr6.67b due beyond 12 months. Offsetting this, it had kr5.79b in cash and kr12.0b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr6.75b.

Given Kongsberg Gruppen has a market capitalization of kr44.6b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Kongsberg Gruppen also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Kongsberg Gruppen has boosted its EBIT by 66%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Kongsberg Gruppen can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kongsberg Gruppen 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. Happily for any shareholders, Kongsberg Gruppen actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Kongsberg Gruppen's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr2.84b. And it impressed us with free cash flow of kr2.5b, being 114% of its EBIT. So we don't think Kongsberg Gruppen's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Kongsberg Gruppen you should know about.

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.

When trading Kongsberg Gruppen or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.