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Kraft Heinz Company, often referred to as KHC, is currently managing a significant debt burden of over $27.1 billion. This debt primarily consists of long-term debt related to their business operations. As a multinational corporation, KHC has faced a multitude of financial challenges and situations over the years, and debt has often been a practical solution to overcome these hurdles....
In addition to their long-term debt, KHC has diversified their financing by issuing various corporate bonds with different maturity dates. One of their notable bonds is the Kraft Heinz Foods 2032 bond. Issuing bonds is an easy way for a company to raise funds through debt, and it's usually more accessible to attract money from investors rather than relying on financial institutions.
The capability of financing from investors versus traditional banks depends on the company's credit rating. A lower credit rating leads to less favorable interest rates when borrowing from banks. In KHC's case, their BBB credit rating means that the interest rates charged by banks are higher compared to the potential coupon payments made to bond investors.
This highlights that investors usually take on more risk than banks when lending to a company like KHC, given its credit rating. Consequently, the company's ability to maintain its creditworthiness plays an important role in determining the interest rates they face when seeking financial support.
Equity Multiplier
Kraft Heinz Company (KHC) has a decent equity multiplier, which is a good sign for investors. However, when we look at KHC compared to its industry rivals, all three of its competitors have even higher equity multipliers. This means that investors are getting more bang for their buck in terms of common stock investments with these competitors. For KHC, this isn't great news because it implies that investors might be more tempted to put their money into the competition. In simpler terms, the lower equity multiplier at KHC could discourage potential investors, leading them to consider other companies that offer better returns on their investments.
Change in long term Leases
KHC has a steady number of long term leases, which is a good sign for the company because this sort of unsteady leases can make it unpredictable for investors and this would also make it less predictable for analysts to try and forecast how much a company will spend on leases on the future because this of course would increase operating expenses and by consequence lowering its profit. However, their competitors also have a common long term leases trend which is also something to take into consideration, however the good from others does not take out the fact that KHC is having a healthy and manageable change in leases expenses.
Interest-Bearing Debt to Total Assets Ratio
The Interest-Bearing Debt to Total Assets ratio is a crucial number in the finance world. It tells us what percentage of a company's assets)is basically financed by debt that carries interest. This kind of debt is a priority because it comes with an interest cost that can eat into a company's profits. Looking at the chart, it's clear that KHC is doing a good job in this department. They consistently keep this ratio lower than their competition, with just one exception. This suggests that KHC is managing its interest costs well and trying not to let it exceed 30% of their total assets. Why does this matter? Well, because interest expenses can be a big chunk of a company's costs. So, the lower this ratio, the better.
Interest-Bearing Debt to Market Value of Equity Ratio
This ratio is like the one we just talked about, but it looks at how much of a company's equity is tied up in interest-bearing debt. It follows a similar pattern as the Interest-Bearing Debt to Total Assets ratio. KHC is doing a good job here too, which shows they are managing their interest expenses and debt well when compared to their competitors.
Net Interest-Bearing Debt to Book Equity and Net Interest-Bearing Debt to Market Capital Structure Ratios
Now, these two ratios are like the ones we discussed earlier, but with a change. We subtract cash equivalents from the interest-bearing debt in these charts. Why? Because cash is super liquid and can be used to pay off debt if needed. In this case, KHC's numbers have gone up a bit, which might be something to look at when compared to the competition. However, this shift could be because KHC is holding onto more cash as a safety net against risks and potential financial troubles. So, it suggests that KHC might have a higher cash reserve compared to its sales, which is an interesting financial strategy...
Interest Coverage Ratio
The Interest Coverage Ratio serves as a key financial metric, addressing both profitability and liquidity concerns, by gauging a company's ability to meet its interest payment obligations on outstanding debt. From an accounting perspective, a desirable value for this ratio is typically considered to be a minimum of 2. In the chart provided, it's evident that KHC maintains a lower interest coverage ratio compared to most of its competitors. However, this doesn't necessarily indicate a negative situation, as KHC consistently exceeds the 2 minimum threshold. It's important to note that companies like Nestle boast stronger ratios, suggesting a higher likelihood of comfortably meeting their interest obligations compared to KHC. Nevertheless, KHC's interest coverage ratio remains robust, signifying a sound credit risk position.
Debt Service Coverage Ratio
The Debt Service Coverage Ratio mirrors the interest coverage ratio but holds even greater significance for financial institutions when assessing the credit risk associated with lending to these companies. This is because this ratio delves into the company's capacity to service its debt, encompassing both interest and principal payments. It's crucial to recognize that financial institutions typically extend loans for interest income, and distinguishing a company's capability to meet not only interest but also principal repayments is paramount. Failure to meet principal payments could result in financial losses for the lender. The graph illustrates that both KHC and Nestle exhibit similar and higher ratios in comparison to Unilever and General Mills. This underscores KHC's formidable ability to service its debt obligations. Such a scenario bodes well for investors, as it signals a high probability of KHC meeting its debt commitments.
Z Score and Final Recommendation
The Z Score is calculated based upon 5 different ratios which are the following:
working capital / total assets
B = retained earnings / total assets
C = earnings before interest and tax / total assets
D = market value of equity / total liabilities
E = sales / total assets
After adding all these ratios we get a number which means how likely the company is to go to bankruptcy. The set limit for accounting standards is that companies with a less then 1.8 Z score are on a thread. However, the Z score is not always accurate, and it is understandable that sometimes companies do not have more than a 1.8 and have under this number. On the graph we can see how KHC has the lowest Z score in comparison to its investors, but it is not that far away from Unilever and General Mills. However, Nestle does has a way higher number some years than KHC, which could mean that nestle is doing significantly better than all of its competitors. All the companies have been on general growth and having a good look to its future. This low Z score does mean that they might be headed to bankruptcy but in my opinion, I believe that they will not be bankrupting anytime soon. This companies are in an industry in which demand will never stop, food and beverage. Meaning that consumers will always consume their products and their sales most likely increase in next years to come. For me they have a lower Z score because of trying to grow and trying to expand which is a good sign. However, if I was an investor I most likely would rather invest in a company with a higher Z score in the industry in which in this case would be Nestle. So in terms of making a judgment of the financial risk of KHC I consider that I would not be scared of investing with the,, however I would most likely select Nestle in this case because of the fact that they follow all the good trends that KHC have but also have a Z Score above the 1.8 headed to bankruptcy indicator.
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