Is Kuehne + Nagel International (VTX: KNIN) using too much debt?

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Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. 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, Kuehne + Nagel International AG (VTX: KNIN) carries the debt. But the most important question is: what risk does this debt create?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. 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. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest analysis for Kuehne + Nagel International

What is the net debt of Kuehne + Nagel International?

The graph below, which you can click for more details, shows that Kuehne + Nagel International had a debt of CHF 406.0 million in June 2021; about the same as the year before. However, his balance sheet shows that he holds 662.0 million Swiss francs in cash, so he actually has 256.0 million Swiss francs in net cash.

SWX: KNIN History of debt to equity October 10, 2021

How strong is Kuehne + Nagel International’s balance sheet?

The latest balance sheet data shows that Kuehne + Nagel International had debts of 6.10 billion francs maturing within one year, and debts of 2.43 billion francs maturing thereafter. In return, he had CHF 662.0 million in cash and CHF 5.33 billion in receivables due within 12 months. Its liabilities are therefore 2.54 billion francs more than the combination of its cash and short-term receivables.

Given that the listed Kuehne + Nagel International shares are worth a very impressive total of CHF 35.8 billion, 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 its notable liabilities, Kuehne + Nagel International has a net cash flow, so it’s fair to say that it does not have a heavy debt load!

On top of that, Kuehne + Nagel International has increased its EBIT by 85% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Kuehne + Nagel International can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Although Kuehne + Nagel International has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is. this cash balance is built (or eroded). Over the past three years, Kuehne + Nagel International has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.

In summary

While it always makes sense to look at a company’s total liabilities, it is very reassuring that Kuehne + Nagel International has 256.0 million Swiss francs in net cash. The icing on the cake is that in converted 110% of this EBIT into free cash flow, bringing in 1.7 billion francs. So, is Kuehne + Nagel International’s debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Kuehne + Nagel International has 2 warning signs (and 1 that can’t be ignored) we think you should be aware of.

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.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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