Is Kratos Defense & Security Solutions (NASDAQ:KTOS) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kratos Defense & Security Solutions

How Much Debt Does Kratos Defense & Security Solutions Carry?

The image below, which you can click on for greater detail, shows that Kratos Defense & Security Solutions had debt of US$189.5m at the end of June 2024, a reduction from US$237.1m over a year. But on the other hand it also has US$308.2m in cash, leading to a US$118.7m net cash position.

How Healthy Is Kratos Defense & Security Solutions' Balance Sheet?

According to the last reported balance sheet, Kratos Defense & Security Solutions had liabilities of US$272.3m due within 12 months, and liabilities of US$312.6m due beyond 12 months. On the other hand, it had cash of US$308.2m and US$338.4m worth of receivables due within a year. So it can boast US$61.7m more liquid assets than total liabilities.

Having regard to Kratos Defense & Security Solutions' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$3.62b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Kratos Defense & Security Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Kratos Defense & Security Solutions's EBIT launched higher than Elon Musk, gaining a whopping 326% on last year. 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 Kratos Defense & Security Solutions 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kratos Defense & Security Solutions 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. During the last three years, Kratos Defense & Security Solutions burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kratos Defense & Security Solutions has net cash of US$118.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 326% over the last year. So we don't have any problem with Kratos Defense & Security Solutions's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Kratos Defense & Security Solutions you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.