These 4 Measures Indicate That Per Aarsleff Holding (CPH:PAAL B) Is Using Debt Reasonably Well

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

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Per Aarsleff Holding

What Is Per Aarsleff Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Per Aarsleff Holding had kr.914.6m of debt, an increase on kr.476.9m, over one year. But on the other hand it also has kr.1.23b in cash, leading to a kr.317.0m net cash position.

How Strong Is Per Aarsleff Holding's Balance Sheet?

We can see from the most recent balance sheet that Per Aarsleff Holding had liabilities of kr.5.01b falling due within a year, and liabilities of kr.966.7m due beyond that. On the other hand, it had cash of kr.1.23b and kr.4.44b worth of receivables due within a year. So its liabilities total kr.305.6m more than the combination of its cash and short-term receivables.

Given Per Aarsleff Holding has a market capitalization of kr.5.56b, 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. Despite its noteworthy liabilities, 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 2.4% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Per Aarsleff Holding'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. 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. Looking at the most recent three years, Per Aarsleff Holding recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

We could understand if investors are concerned about Per Aarsleff Holding's liabilities, but we can be reassured by the fact it has has net cash of kr.317.0m. And it also grew its EBIT by 2.4% over the last year. So we don't have any problem with Per Aarsleff Holding's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Per Aarsleff Holding (of which 1 is concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.