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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Gruppen ASA (OB:KOG) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out 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 kr2.45b at the end of March 2022, a reduction from kr3.47b over a year. However, its balance sheet shows it holds kr7.36b in cash, so it actually has kr4.91b net cash.

A Look At Kongsberg Gruppen's Liabilities

Zooming in on the latest balance sheet data, we can see that Kongsberg Gruppen had liabilities of kr19.1b due within 12 months and liabilities of kr6.56b due beyond that. Offsetting these obligations, it had cash of kr7.36b as well as receivables valued at kr12.1b due within 12 months. So it has liabilities totalling kr6.20b more than its cash and near-term receivables, combined.

Given Kongsberg Gruppen has a market capitalization of kr59.2b, it's hard to believe these liabilities pose much threat. 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!

Another good sign is that Kongsberg Gruppen has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kongsberg Gruppen can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. 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

While Kongsberg Gruppen does have more liabilities than liquid assets, it also has net cash of kr4.91b. And it impressed us with free cash flow of kr3.0b, being 102% of its EBIT. 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. Be aware that Kongsberg Gruppen is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.