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 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. Importantly, Per Aarsleff Holding A/S (CPH:PAAL B) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Per Aarsleff Holding

How Much Debt Does Per Aarsleff Holding Carry?

As you can see below, Per Aarsleff Holding had kr.1.10b of debt at December 2023, down from kr.1.75b a year prior. However, it does have kr.1.10b in cash offsetting this, leading to net cash of kr.7.00m.

A Look At Per Aarsleff Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Per Aarsleff Holding had liabilities of kr.6.05b due within 12 months and liabilities of kr.2.23b due beyond that. On the other hand, it had cash of kr.1.10b and kr.6.46b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.716.0m.

Given Per Aarsleff Holding has a market capitalization of kr.6.59b, 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. While it does have liabilities worth noting, Per Aarsleff Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Per Aarsleff Holding has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Per Aarsleff Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Per Aarsleff Holding's free cash flow amounted to 24% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Per Aarsleff Holding does have more liabilities than liquid assets, it also has net cash of kr.7.00m. And it impressed us with its EBIT growth of 36% over the last year. So we don't think Per Aarsleff Holding's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Per Aarsleff Holding's earnings per share history for free.

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.

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.