Simply Wall St

Does Kraft Heinz (NASDAQ:KHC) Have a Good Budget?

David Eben put it well when he said: “Volatile is not a risk we care about. What we care about is avoiding permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, because an excessive debt load can lead to ruin . More important , Kraft Heinz Company (NASDAQ: KHC) Taking on debt. But the more important question is: How much risk does this debt create?

Why does debt carry risks?

Generally, debt becomes a real problem only when the company cannot pay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” in which failed companies are ruthlessly liquidated by bankers. However, the more frequent (but still costly) occurrence is where a company must issue shares at bargain low prices, permanently weakening shareholders, just to prop up its balance sheet. By replacing dilution, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a company is using is to look at both liquidity and debt.

Check out our latest analysis for Kraft Heinz

How much debt does Kraft Heinz have?

You can click on the chart below for historical figures, but it shows that Kraft Heinz had $21.1 billion in debt in June 2022, down from $25.3 billion, one year earlier. However, since it has a cash reserve of US$1.52 billion, its net debt is lower, at around US$19.6 billion.

NasdaqGS: Debt-to-Equity History of KHC on September 26, 2022

How healthy is Kraft Heinz’s balance sheet?

The latest balance sheet data shows that Kraft Heinz has liabilities of $9.12 billion maturing within a year, and liabilities of $33.6 billion maturing thereafter. Against these obligations, it had $1.52 billion in cash plus $2.15 billion in receivables due within 12 months. So its total liabilities are $39.0 billion more than the sum of its cash and short-term receivables.

This shortfall is significant relative to its very large market capitalization of $41.6 billion, so it suggests that shareholders should monitor Kraft Heinz’s use of debt. If its lenders demand balance sheet support, shareholders will likely face severe dilution.

We use two main ratios to inform us of debt levels relative to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its EBIT covers interest expense (or interest cover, for short). In this way, we take into account both the absolute amount of the debt, as well as the interest rates paid on it.

Kraft Heinz’s debt is 3.3 times its EBITDA, and its EBITDA covers 3.5 times its interest expense. Taken together, this means that while we don’t want to see debt levels go up, we believe the current leverage can be handled. Another concern for investors may be that Kraft Heinz’s earnings have fallen 15% in the past year. If things continue like this, dealing with debt will be as easy as packing an angry house cat into her travel crate. When analyzing debt levels, the balance sheet is the obvious place to start. But future earnings, more than anything else, will determine Kraft Heinz’s ability to maintain a healthy balance sheet going forward. So if you focus on the future, you can check it out Free Report showing analyst earnings forecasts.

Finally, the company can only pay off debts with hard cash, not accounting profits. So obviously we need to consider whether this EBIT leads to the corresponding free cash flow. Over the past three years, Kraft Heinz has generated robust free cash flow equivalent to 67% of its EBIT, about what we would expect. This free cash flow puts the company in a good position to pay off debt, when required.

we saw

Given Kraft Heinz’s attempt (not to) increase its EBIT, we’re certainly not excited. But it’s at least very good at converting EBIT into free cash flow; This is encouraging. Looking at the balance sheet and taking all of these factors into account, we think debt makes Kraft Heinz stock a bit risky. This isn’t necessarily a bad thing, but we’ll generally feel more comfortable with less leverage. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. For example, we have defined 4 Warning Signs for Kraft Heinz (1 potentially dangerous) you should be aware of.

If you are interested in investing in a business that can generate profits without the burden of debt, check it out Free List of growing companies that have net cash on the balance sheet.

This article by Simply Wall St is general in nature. We provide comments based only on historical data and analyst expectations using an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock, nor does it take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by essential data. Note that our analysis may not include the company’s most recent price-sensitive ads or quality materials. Wall Street simply has no position in any of the stocks mentioned.

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Find out if Kraft Heinz potentially overvalued or undervalued by checking out our comprehensive analysis, which includes Fair value estimates, risks, warnings, dividends, insider transactions and financial soundness.

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