Kongsberg Gruppen (OB:KOG) Seems To Use Debt Rather Sparingly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Kongsberg Gruppen ASA (OB:KOG) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Kongsberg Gruppen's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kongsberg Gruppen had kr2.50b of debt in December 2024, down from kr3.00b, one year before. But it also has kr14.3b in cash to offset that, meaning it has kr11.8b net cash.

How Strong Is Kongsberg Gruppen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kongsberg Gruppen had liabilities of kr43.7b due within 12 months and liabilities of kr6.45b due beyond that. Offsetting this, it had kr14.3b in cash and kr25.3b in receivables that were due within 12 months. So its liabilities total kr10.6b more than the combination of its cash and short-term receivables.

Of course, Kongsberg Gruppen has a titanic market capitalization of kr282.9b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Kongsberg Gruppen boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Kongsberg Gruppen

On top of that, Kongsberg Gruppen grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Kongsberg Gruppen has kr11.8b in net cash. And it impressed us with free cash flow of kr12b, being 104% of its EBIT. So is Kongsberg Gruppen's debt a risk? It doesn't seem so to us. We'd be very excited to see if Kongsberg Gruppen insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.