We Think Scandinavian Astor Group (FRA:Y73) Is Taking Some Risk With Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Scandinavian Astor Group AB (publ) (FRA:Y73) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Our free stock report includes 2 warning signs investors should be aware of before investing in Scandinavian Astor Group. Read for free now.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Scandinavian Astor Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Scandinavian Astor Group had debt of kr68.4m, up from kr35.2m in one year. However, it also had kr49.7m in cash, and so its net debt is kr18.7m.

How Healthy Is Scandinavian Astor Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Scandinavian Astor Group had liabilities of kr118.7m due within 12 months and liabilities of kr90.1m due beyond that. On the other hand, it had cash of kr49.7m and kr55.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr104.0m.

Given Scandinavian Astor Group has a market capitalization of kr1.26b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Scandinavian Astor Group has virtually no net debt, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Scandinavian Astor Group

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Scandinavian Astor Group has a very low debt to EBITDA ratio of 0.95 so it is strange to see weak interest coverage, with last year's EBIT being only 1.5 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. Notably, Scandinavian Astor Group made a loss at the EBIT level, last year, but improved that to positive EBIT of kr5.6m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Scandinavian Astor Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Scandinavian Astor Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Both Scandinavian Astor Group's conversion of EBIT to free cash flow and its interest cover were discouraging. But its not so bad at managing its debt, based on its EBITDA,. When we consider all the factors discussed, it seems to us that Scandinavian Astor Group is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Scandinavian Astor Group (1 is concerning!) that you should be aware of before investing here.

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

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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.