Kratos Defense & Security Solutions (NASDAQ:KTOS) Has A Somewhat Strained Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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$179.8m at the end of June 2025, a reduction from US$189.5m over a year. However, it does have US$783.6m in cash offsetting this, leading to net cash of US$603.8m.

A Look At Kratos Defense & Security Solutions' Liabilities

Zooming in on the latest balance sheet data, we can see that Kratos Defense & Security Solutions had liabilities of US$322.4m due within 12 months and liabilities of US$303.3m due beyond that. On the other hand, it had cash of US$783.6m and US$398.8m worth of receivables due within a year. So it can boast US$556.7m more liquid assets than total liabilities.

This surplus suggests that Kratos Defense & Security Solutions has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kratos Defense & Security Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Kratos Defense & Security Solutions

It is just as well that Kratos Defense & Security Solutions's load is not too heavy, because its EBIT was down 46% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Kratos Defense & Security Solutions'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kratos Defense & Security Solutions 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, Kratos Defense & Security Solutions saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Kratos Defense & Security Solutions has US$603.8m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Kratos Defense & Security Solutions's balance sheet. Given our hesitation about the stock, it would be good to know if Kratos Defense & Security Solutions insiders have sold any shares recently. You click here to find out if insiders have sold recently.

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.