Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?
What Risk Does Debt Bring?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Kongsberg Gruppen's Net Debt?
As you can see below, Kongsberg Gruppen had kr3.48b of debt at September 2020, down from kr4.09b a year prior. But on the other hand it also has kr8.10b in cash, leading to a kr4.62b net cash position.
How Healthy Is Kongsberg Gruppen's Balance Sheet?
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 kr6.51b due beyond that. Offsetting these obligations, it had cash of kr8.10b as well as receivables valued at kr11.6b due within 12 months. So it has liabilities totalling kr4.71b more than its cash and near-term receivables, combined.
Of course, Kongsberg Gruppen has a market capitalization of kr30.6b, 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!
Even more impressive was the fact that Kongsberg Gruppen grew its EBIT by 151% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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.
While Kongsberg Gruppen does have more liabilities than liquid assets, it also has net cash of kr4.62b. The cherry on top was that in converted 141% of that EBIT to free cash flow, bringing in kr2.7b. So is Kongsberg Gruppen's debt a risk? It doesn't seem so to us. 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.
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. 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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