Stock Analysis

Does Kraft Heinz (NASDAQ:KHC) Have A Healthy Balance Sheet?

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NasdaqGS:KHC
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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.' 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. Importantly, The Kraft Heinz Company (NASDAQ:KHC) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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 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 Kraft Heinz

How Much Debt Does Kraft Heinz Carry?

You can click the graphic below for the historical numbers, but it shows that Kraft Heinz had US$21.1b of debt in June 2022, down from US$25.3b, one year before. However, because it has a cash reserve of US$1.52b, its net debt is less, at about US$19.6b.

debt-equity-history-analysis
NasdaqGS:KHC Debt to Equity History September 26th 2022

How Healthy Is Kraft Heinz's Balance Sheet?

The latest balance sheet data shows that Kraft Heinz had liabilities of US$9.12b due within a year, and liabilities of US$33.6b falling due after that. Offsetting these obligations, it had cash of US$1.52b as well as receivables valued at US$2.15b due within 12 months. So its liabilities total US$39.0b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its very significant market capitalization of US$41.6b, so it does suggest shareholders should keep an eye on Kraft Heinz's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Kraft Heinz's debt is 3.3 times its EBITDA, and its EBIT cover its interest expense 3.5 times over. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Another concern for investors might be that Kraft Heinz's EBIT fell 15% in the last year. If things keep going like that, handling the debt will about as easy as bundling an angry house cat into its travel box. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kraft Heinz's ability to maintain a healthy balance sheet going forward. 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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Kraft Heinz produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Mulling over Kraft Heinz's attempt at (not) growing its EBIT, we're certainly not enthusiastic. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Kraft Heinz stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Kraft Heinz (1 is potentially serious) you should be aware of.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Kraft Heinz is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NasdaqGS:KHC

Kraft Heinz

The Kraft Heinz Company, together with its subsidiaries, manufactures and markets food and beverage products in the United States, Canada, the United Kingdom, and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth1
Past Performance0
Financial Health4
Dividends2

Read more about these checks in the individual report sections or in our analysis model.

Adequate balance sheet and slightly overvalued.