Kraft Heinz (NASDAQ:KHC) takes some risk with its use of debt

David Iben put it best when he said, “Volatility is not a risk we care about. We care about avoiding permanent loss of capital.” It’s only natural to consider a company’s balance sheet when you check how risky it is, as debt is often involved in a company collapse. We take note of that The Kraft Heinz Company (NASDAQ:KHC) has debt on its balance sheet. But should shareholders be concerned about the use of debt?

When is debt a problem?

Debt helps a business until it has difficulty paying it off, whether with new capital or free cash flow. A key component of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, especially capital-intensive businesses. When we examine debt levels, we first consider both cash and debt levels together.

Check out our latest analysis for Kraft Heinz

How much debt does Kraft Heinz have?

The chart below, which you can click on for more details, shows that Kraft Heinz had $20.1 billion in debt as of September 2024; about the same as the year before. However, the company also had $1.28 billion in cash, putting its net debt at $18.8 billion.

How strong is Kraft Heinz’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Kraft Heinz had liabilities of US$7.73b due within 12 months and liabilities of US$32.4b due within 12 months. which were due beyond that. Offsetting this, it had US$1.28 billion in cash and US$2.18 billion in receivables that were due within 12 months. So its liabilities total US$36.6b more than its cash and short-term receivables combined.

This deficit is significant compared to its very significant market capitalization of $38.2 billion, so shareholders should keep an eye on Kraft Heinz’s use of debt. This suggests that shareholders would be severely diluted if the company had to rush to shore up its balance sheet.

We measure a company’s debt load relative to its earnings power by dividing its net debt by its earnings before interest, tax, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and tax (EBIT) can cover its interest expense (interest cover). ). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio).

Kraft Heinz has a debt to EBITDA ratio of 2.9 and its EBIT covered its interest expense by 6.4 times. Taken together, this means that while we do not want to see debt levels increase, we believe current levels of debt can be managed. Importantly, Kraft Heinz’s EBIT was essentially flat over the last twelve months. Ideally, it can reduce its debt load by boosting profit growth. There is no doubt that the balance sheet is where we learn the most about debt. Ultimately, however, the company’s future profitability will determine whether Kraft Heinz can strengthen its balance sheet over time. So if you’re focused on the future, you can look at that free Report with analyst profit forecasts.

But our final consideration is also important, because a company cannot pay off its debts with paper profits; it takes cash. So we always check how much of that EBIT is converted into free cash flow. Over the last three years, Kraft Heinz generated stable free cash flow accounting for 56% of its EBIT, which is about in line with our expectations. That ready cash means it can pay down its debt whenever it wants.

Our view

The size of Kraft Heinz’s total liabilities turned out to be a real negative in this analysis, although the other factors we considered put them in a much better light. For example, the conversion of EBIT to free cash flow is relatively strong. When we consider all the factors discussed, it seems to us that Kraft Heinz is taking certain risks by using debt. Although this debt can boost returns, we believe the company has enough leverage now. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example – Kraft Heinz has 4 warning signs We think you should be aware of this.

If you’re interested in investing in companies that can grow profits without the burden of debt, then check this out free List of growing companies that have net cash on the balance sheet.

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 positions in any stocks mentioned.