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 Kuehne + Nagel International AG (VTX:KNIN) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Kuehne + Nagel International
What Is Kuehne + Nagel International's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Kuehne + Nagel International had CHF795.0m of debt, an increase on CHF419.0m, over one year. However, because it has a cash reserve of CHF505.0m, its net debt is less, at about CHF290.0m.
A Look At Kuehne + Nagel International's Liabilities
We can see from the most recent balance sheet that Kuehne + Nagel International had liabilities of CHF5.32b falling due within a year, and liabilities of CHF2.40b due beyond that. On the other hand, it had cash of CHF505.0m and CHF4.32b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF2.89b.
Since publicly traded Kuehne + Nagel International shares are worth a very impressive total of CHF18.1b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.