In This Article:
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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Koenig & Bauer AG (FRA:SKB) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Koenig & Bauer
What Is Koenig & Bauer's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Koenig & Bauer had €152.0m of debt, an increase on €59.2m, over one year. However, it also had €91.4m in cash, and so its net debt is €60.6m.
How Healthy Is Koenig & Bauer's Balance Sheet?
The latest balance sheet data shows that Koenig & Bauer had liabilities of €589.4m due within a year, and liabilities of €235.2m falling due after that. Offsetting this, it had €91.4m in cash and €131.0m in receivables that were due within 12 months. So its liabilities total €602.2m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's €505.7m market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.