Is KWS SAAT SE KGaA (ETR:KWS) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, KWS SAAT SE & Co. KGaA (ETR:KWS) does carry debt. But the real question is whether this debt is making the company risky.

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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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is KWS SAAT SE KGaA's Net Debt?

The image below, which you can click on for greater detail, shows that KWS SAAT SE KGaA had debt of €551.7m at the end of December 2024, a reduction from €1.07b over a year. However, it does have €208.3m in cash offsetting this, leading to net debt of about €343.4m.

How Strong Is KWS SAAT SE KGaA's Balance Sheet?

The latest balance sheet data shows that KWS SAAT SE KGaA had liabilities of €597.1m due within a year, and liabilities of €590.3m falling due after that. Offsetting these obligations, it had cash of €208.3m as well as receivables valued at €372.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €606.2m.

This deficit isn't so bad because KWS SAAT SE KGaA is worth €1.81b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

See our latest analysis for KWS SAAT SE KGaA

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

KWS SAAT SE KGaA's net debt is only 0.90 times its EBITDA. And its EBIT easily covers its interest expense, being 27.1 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Another good sign is that KWS SAAT SE KGaA has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine KWS SAAT SE KGaA's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, KWS SAAT SE KGaA basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Our View

Both KWS SAAT SE KGaA's ability to to cover its interest expense with its EBIT and its EBIT growth rate gave us comfort that it can handle its debt. But truth be told its conversion of EBIT to free cash flow had us nibbling our nails. When we consider all the elements mentioned above, it seems to us that KWS SAAT SE KGaA is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for KWS SAAT SE KGaA that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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