Kongsberg Gruppen (OB:KOG) Could Easily Take On More 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. We can see that Kongsberg Gruppen ASA (OB:KOG) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kongsberg Gruppen

What Is Kongsberg Gruppen's Debt?

The chart below, which you can click on for greater detail, shows that Kongsberg Gruppen had kr2.45b in debt in December 2022; about the same as the year before. But on the other hand it also has kr3.93b in cash, leading to a kr1.48b net cash position.

A Look At Kongsberg Gruppen's Liabilities

Zooming in on the latest balance sheet data, we can see that Kongsberg Gruppen had liabilities of kr24.1b due within 12 months and liabilities of kr5.38b due beyond that. Offsetting these obligations, it had cash of kr3.93b as well as receivables valued at kr15.9b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr9.67b.

Since publicly traded Kongsberg Gruppen shares are worth a total of kr74.7b, 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. Despite its noteworthy liabilities, Kongsberg Gruppen boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Kongsberg Gruppen grew its EBIT at 16% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 75% 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 Kongsberg Gruppen does have more liabilities than liquid assets, it also has net cash of kr1.48b. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in kr50m. So is Kongsberg Gruppen's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Kongsberg Gruppen has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.