Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Krones SA (ETR: KRN) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Krones
What is Krones’ net debt?
The image below, which you can click for more details, shows Krones owed € 14.8 million in debt at the end of June 2021, up from € 275.1 million over one year. But he also has € 218.5million in cash to make up for that, meaning he has € 203.7million in net cash.
How healthy is Krones’ track record?
Zooming in on the latest balance sheet data, we can see that Krones had debts of € 1.55 billion due within 12 months and debts of € 473.2 million due beyond. In compensation for these commitments, it had cash of € 218.5 million as well as receivables valued at € 1.35 billion maturing in 12 months. It therefore has liabilities totaling € 451.9 million more than its combined cash and short-term receivables.
Given that publicly traded Krones shares are worth a total of 2.68 billion euros, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite her notable liabilities, Krones has a net cash flow, so it’s fair to say that she doesn’t have a heavy debt load!
In fact, Krones’ saving grace is its low level of debt, as its EBIT has fallen 25% in the past twelve months. When it comes to paying down debt, lower income is no more helpful to your health than sugary sodas. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Krones can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. While Krones has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building (or erodes) that cash balance. . Over the past three years, Krones has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
While Krones has more liabilities than liquid assets, it also has net cash of € 203.7 million. The icing on the cake is that he converted 127% of that EBIT into free cash flow, bringing in 323 million euros. So we’re not concerned with Krones’ use of debt. While Krones did not make a statutory profit last year, its positive EBIT suggests that profitability may not be far off. Click here to see if its profits are heading in the right direction over the medium term.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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