Kongsberg Gruppen (OB:KOG) Could Easily Take On More Debt

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.' 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. We note that Kongsberg Gruppen ASA (OB:KOG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Gruppen

What Is Kongsberg Gruppen's Debt?

You can click the graphic below for the historical numbers, but it shows that Kongsberg Gruppen had kr2.96b of debt in June 2021, down from kr3.55b, one year before. However, it does have kr5.79b in cash offsetting this, leading to net cash of kr2.84b.

A Look At Kongsberg Gruppen's Liabilities

We can see from the most recent balance sheet that Kongsberg Gruppen had liabilities of kr17.9b falling due within a year, and liabilities of kr6.67b due beyond that. Offsetting these obligations, it had cash of kr5.79b as well as receivables valued at kr12.0b due within 12 months. So it has liabilities totalling kr6.75b more than its cash and near-term receivables, combined.

Since publicly traded Kongsberg Gruppen shares are worth a total of kr48.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, Kongsberg Gruppen actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Kongsberg Gruppen does have more liabilities than liquid assets, it also has net cash of kr2.84b. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in kr2.5b. So is Kongsberg Gruppen's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Kongsberg Gruppen has 1 warning sign we think you should be aware of.

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.

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.

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