We Think Kongsberg Gruppen (OB:KOG) Can Manage Its Debt With Ease

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 note that Kongsberg Gruppen ASA (OB:KOG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kongsberg Gruppen

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 June 2024, down from kr3.46b, one year before. However, its balance sheet shows it holds kr5.94b in cash, so it actually has kr3.44b 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 kr33.0b due within 12 months and liabilities of kr6.27b due beyond that. On the other hand, it had cash of kr5.94b and kr21.9b worth of receivables due within a year. So its liabilities total kr11.4b more than the combination of its cash and short-term receivables.

Given Kongsberg Gruppen has a humongous market capitalization of kr186.7b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 32%, 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 most recent three years, Kongsberg Gruppen recorded free cash flow worth 70% 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

We could understand if investors are concerned about Kongsberg Gruppen's liabilities, but we can be reassured by the fact it has has net cash of kr3.44b. And we liked the look of last year's 32% year-on-year EBIT growth. 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. 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.