These 4 metrics indicate that Kronos Worldwide (NYSE: KRO) is using debt reasonably well
Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Kronos Worldwide, Inc. (NYSE: KRO) uses debt. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. 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 costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest analysis for Kronos Worldwide
How much debt does Kronos Worldwide have in the world?
You can click on the graph below for historical figures, but it shows that as of March 2021, Kronos Worldwide had a debt of US $ 466.6 million, an increase from US $ 437.7 million. , over one year. However, he also had $ 373.6 million in cash, so his net debt is $ 93.0 million.
How healthy is Kronos Worldwide’s balance sheet?
The latest balance sheet data shows that Kronos Worldwide had liabilities of US $ 255.2 million due within one year, and liabilities of US $ 940.5 million due thereafter. In return, he had $ 373.6 million in cash and $ 338.3 million in receivables due within 12 months. It therefore has a liability totaling US $ 483.8 million more than its cash and short-term receivables combined.
This deficit is not that big as Kronos Worldwide is worth US $ 1.64 billion, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Looking at its net debt over EBITDA of 0.58 and interest coverage of 5.6 times, it seems to us that Kronos Worldwide is probably using the debt in a fairly reasonable way. But the interest payments are certainly enough to make us think about how affordable his debt is. Unfortunately, Kronos Worldwide has seen its EBIT fall by 5.9% over the past twelve months. If this earnings trend continues, its debt load will rise like the heart of a polar bear watching its only cub. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Kronos Worldwide’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Kronos Worldwide has recorded free cash flow equivalent to 61% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Kronos Worldwide’s ability to manage its debt, based on its EBITDA, and its conversion of EBIT to free cash flow have reinforced our ability to manage its debt. On the other hand, its EBIT growth rate makes us a little less comfortable about its debt. Given this range of data points, we believe Kronos Worldwide is well positioned to manage its debt levels. That said, the load is heavy enough that we recommend that any shareholder watch it closely. 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, we discovered 4 warning signs for Kronos Worldwide which you should know before investing here.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
When trading Kronos Worldwide or any other investment, use the platform seen by many as the gateway for professionals to the global market, Interactive Brokers. You get the cheapest * trading on stocks, options, futures, forex, bonds and funds from around the world from a single integrated account.
This Simply Wall St article is general in nature. 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 material. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.