Is Kudelski (VTX:KUD) Taking On Too Much Debt?

External fund manager Li Lu, backed by Berkshire Hathaway’s Charlie Munger, 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 wise Minds know that debt – which is usually associated with bankruptcies – is a very important factor when assessing a company’s risk. What is important is Kudelski SA (VTX:KUD) carries debt. But the more important question is: How much risk does this debt pose?

When is debt dangerous?

Debt helps a business until the business has difficulty paying it off, whether with new capital or free cash flow. If the company can’t meet its legal obligations to pay down debt, shareholders could end up with nothing. While this isn’t all that common, we often see indebted companies permanently diluting their shareholders because lenders force them to raise capital at a distressed price. Of course, many companies use debt to finance their growth without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Kudelski

How much does Kudelski owe?

The image below, which you can click on for more details, shows that Kudelski had $189.4 million in debt at the end of June 2024, a reduction from $259.9 million over the course of a year. On the other hand, the company has cash of $44.2 million, leading to net debt of around $145.2 million.

A look at Kudelski’s liabilities

The latest balance sheet data shows that Kudelski had liabilities of US$538.2m within a year, and liabilities of US$70.6m falling due after that. Offsetting these obligations, the company had cash of US$44.2m as well as receivables valued at US$44.6m due within 12 months. So it has liabilities totaling US$520.0m more than its cash and short-term receivables combined.

This shortage weighs heavily on the $80.1 million company itself, like a child struggling under the weight of a giant backpack full of books, his sports gear and a trumpet. So we would no doubt keep a close eye on its balance sheet. After all, Kudelski would likely need a major recapitalization if it had to pay its creditors today. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings that will determine whether Kudelski can maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Last year, Kudelski wasn’t profitable at the EBIT level, but managed to grow its revenue by 32% to $752 million. Shareholders are probably keeping their fingers crossed that the company can grow into profitability.

Precautionary measure

Despite the sales growth, Kudelski still recorded a loss in earnings before interest and taxes (EBIT) last year. In fact, the company lost a significant $16 million at the EBIT level. Combine this with the very significant balance sheet liabilities mentioned above and we are so suspicious that we are basically at a loss for words. Sure, the company could have a nice story about how it’s moving toward a better future. However, the reality is that cash is tight relative to liabilities, and the company lost $38 million last year. Therefore, we consider buying this stock to be risky. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be difficult to identify. Every company has them, and we discovered them 3 warning signs for Kudelski you should know that.

If you’re the kind of investor who prefers buying stocks without the burden of debt, then don’t hesitate to explore our exclusive list of net cash growth stocks today.

Do you have feedback on this article? Worried about the content? Get in touch directly with us. Alternatively, you can also send an email to editor-team (at) simplywallst.com.

This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.