These 4 Measures Indicate That Flügger group (CPH:FLUG B) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Flügger group A/S (CPH:FLUG B) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Flügger group

What Is Flügger group's Net Debt?

The image below, which you can click on for greater detail, shows that at October 2020 Flügger group had debt of kr.14.0m, up from kr.900.0k in one year. But on the other hand it also has kr.239.0m in cash, leading to a kr.225.0m net cash position.

How Healthy Is Flügger group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Flügger group had liabilities of kr.518.0m due within 12 months and liabilities of kr.313.0m due beyond that. On the other hand, it had cash of kr.239.0m and kr.335.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.257.0m.

Of course, Flügger group has a market capitalization of kr.2.05b, so these liabilities are probably manageable. 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, Flügger group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Flügger group grew its EBIT by 186% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Flügger group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Flügger group 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. Over the last three years, Flügger group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Flügger group does have more liabilities than liquid assets, it also has net cash of kr.225.0m. The cherry on top was that in converted 127% of that EBIT to free cash flow, bringing in kr.240m. So is Flügger group'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. For instance, we've identified 1 warning sign for Flügger group that you should be aware of.

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. 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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