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

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. Importantly, Kongsberg Gruppen ASA (OB:KOG) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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

What Is Kongsberg Gruppen's Debt?

The image below, which you can click on for greater detail, shows that Kongsberg Gruppen had debt of kr2.50b at the end of September 2024, a reduction from kr4.20b over a year. But it also has kr7.13b in cash to offset that, meaning it has kr4.63b net cash.

A Look At Kongsberg Gruppen's Liabilities

According to the last reported balance sheet, Kongsberg Gruppen had liabilities of kr33.7b due within 12 months, and liabilities of kr6.37b due beyond 12 months. Offsetting these obligations, it had cash of kr7.13b as well as receivables valued at kr22.7b due within 12 months. So it has liabilities totalling kr10.2b more than its cash and near-term receivables, combined.

Given Kongsberg Gruppen has a humongous market capitalization of kr237.5b, 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 38%, thus reducing the spectre of future debt repayments. 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'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. 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 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Kongsberg Gruppen's liabilities, but we can be reassured by the fact it has has net cash of kr4.63b. And we liked the look of last year's 38% year-on-year EBIT growth. So we don't think Kongsberg Gruppen's use of debt is risky. 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.

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.

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

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.