Kronos Worldwide (NYSE:KRO) Is Making Moderate Use Of Debt

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. As with many other companies Kronos Worldwide, Inc. (NYSE:KRO) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kronos Worldwide

What Is Kronos Worldwide's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Kronos Worldwide had debt of US$423.2m, up from US$392.2m in one year. However, because it has a cash reserve of US$155.3m, its net debt is less, at about US$267.9m.

How Strong Is Kronos Worldwide's Balance Sheet?

According to the last reported balance sheet, Kronos Worldwide had liabilities of US$256.2m due within 12 months, and liabilities of US$626.5m due beyond 12 months. Offsetting these obligations, it had cash of US$155.3m as well as receivables valued at US$299.8m due within 12 months. So its liabilities total US$427.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Kronos Worldwide is worth US$997.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Kronos Worldwide can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Kronos Worldwide made a loss at the EBIT level, and saw its revenue drop to US$1.6b, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Kronos Worldwide's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$75m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$97m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for Kronos Worldwide you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.