Kratos Defense & Security Solutions (NASDAQ:KTOS) Seems To Use Debt Quite Sensibly

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 should shareholders be worried about its use of debt?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kratos Defense & Security Solutions

What Is Kratos Defense & Security Solutions's Debt?

The image below, which you can click on for greater detail, shows that Kratos Defense & Security Solutions had debt of US$179.4m at the end of March 2024, a reduction from US$250.3m over a year. However, it does have US$338.9m in cash offsetting this, leading to net cash of US$159.5m.

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

Zooming in on the latest balance sheet data, we can see that Kratos Defense & Security Solutions had liabilities of US$288.2m due within 12 months and liabilities of US$297.8m due beyond that. Offsetting this, it had US$338.9m in cash and US$325.8m in receivables that were due within 12 months. So it actually has US$78.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Kratos Defense & Security Solutions could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kratos Defense & Security Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Kratos Defense & Security Solutions is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 440% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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. Over the last three years, Kratos Defense & Security Solutions saw substantial negative free cash flow, in total. 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$159.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 440% over the last year. So we are not troubled with Kratos Defense & Security Solutions's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Kratos Defense & Security Solutions that you should be aware of before investing here.

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.