Would Kronos Worldwide (NYSE:KRO) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Kronos Worldwide, Inc. (NYSE:KRO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

The chart below, which you can click on for greater detail, shows that Kronos Worldwide had US$426.9m in debt in March 2024; about the same as the year before. On the flip side, it has US$120.7m in cash leading to net debt of about US$306.2m.

A Look At Kronos Worldwide's Liabilities

The latest balance sheet data shows that Kronos Worldwide had liabilities of US$267.9m due within a year, and liabilities of US$637.1m falling due after that. On the other hand, it had cash of US$120.7m and US$348.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$435.6m.

This deficit isn't so bad because Kronos Worldwide is worth US$1.63b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Kronos Worldwide'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.

Over 12 months, Kronos Worldwide made a loss at the EBIT level, and saw its revenue drop to US$1.7b, which is a fall of 4.2%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Kronos Worldwide produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$20m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$26m into a profit. So we do think this stock is quite risky. 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.

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.