Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Kratos Defense & Security Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that Kratos Defense & Security Solutions had debt of US$190.6m at the end of March 2024, a reduction from US$250.3m over a year. However, it does have US$338.9m in cash offsetting this, leading to net cash of US$148.3m.

How Healthy Is Kratos Defense & Security Solutions' Balance Sheet?

According to the last reported balance sheet, Kratos Defense & Security Solutions had liabilities of US$288.2m due within 12 months, and liabilities of US$297.8m due beyond 12 months. On the other hand, it had cash of US$338.9m and US$325.8m worth of receivables due within a year. So it can boast US$78.7m more liquid assets than total liabilities.

This surplus suggests that Kratos Defense & Security Solutions has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kratos Defense & Security Solutions has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Kratos Defense & Security Solutions's EBIT launched higher than Elon Musk, gaining a whopping 440% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kratos Defense & Security Solutions can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kratos Defense & Security Solutions has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Kratos Defense & Security Solutions saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kratos Defense & Security Solutions has net cash of US$148.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 440% year-on-year EBIT growth. So we are not troubled with Kratos Defense & Security Solutions's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Kratos Defense & Security Solutions that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com