Per Aarsleff Holding (CPH:PAAL B) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Per Aarsleff Holding A/S (CPH:PAAL B) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Per Aarsleff Holding

What Is Per Aarsleff Holding's Net Debt?

As you can see below, at the end of June 2021, Per Aarsleff Holding had kr.510.5m of debt, up from kr.431.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr.1.23b in cash, so it actually has kr.724.3m net cash.

A Look At Per Aarsleff Holding's Liabilities

We can see from the most recent balance sheet that Per Aarsleff Holding had liabilities of kr.4.87b falling due within a year, and liabilities of kr.781.8m due beyond that. Offsetting this, it had kr.1.23b in cash and kr.4.48b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Per Aarsleff Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the kr.5.52b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Per Aarsleff Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

While Per Aarsleff Holding doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Per Aarsleff Holding generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Per Aarsleff Holding has kr.724.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -kr.443m, being 88% of its EBIT. So is Per Aarsleff Holding's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Per Aarsleff Holding you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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