Is Per Aarsleff Holding (CPH:PAAL B) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Per Aarsleff Holding A/S (CPH:PAAL B) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Per Aarsleff Holding

How Much Debt Does Per Aarsleff Holding Carry?

You can click the graphic below for the historical numbers, but it shows that Per Aarsleff Holding had kr.476.9m of debt in December 2020, down from kr.561.2m, one year before. But it also has kr.1.73b in cash to offset that, meaning it has kr.1.25b net cash.

How Strong Is Per Aarsleff Holding's Balance Sheet?

According to the last reported balance sheet, Per Aarsleff Holding had liabilities of kr.4.27b due within 12 months, and liabilities of kr.1.08b due beyond 12 months. On the other hand, it had cash of kr.1.73b and kr.3.76b worth of receivables due within a year. So it can boast kr.140.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Per Aarsleff Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Per Aarsleff Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Per Aarsleff Holding has increased its EBIT by 6.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Per Aarsleff Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Per Aarsleff Holding 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. Happily for any shareholders, Per Aarsleff Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Per Aarsleff Holding has net cash of kr.1.25b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of kr.727m, being 107% of its EBIT. So we don't think Per Aarsleff Holding's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Per Aarsleff Holding, you may well want to click here to check an interactive graph of its earnings per share history.

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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