Does ALK-Abelló (CPH:ALK B) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies ALK-Abelló A/S (CPH:ALK B) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for ALK-Abelló

What Is ALK-Abelló's Debt?

You can click the graphic below for the historical numbers, but it shows that ALK-Abelló had kr.194.0m of debt in June 2024, down from kr.459.0m, one year before. But on the other hand it also has kr.420.0m in cash, leading to a kr.226.0m net cash position.

A Look At ALK-Abelló's Liabilities

According to the last reported balance sheet, ALK-Abelló had liabilities of kr.1.15b due within 12 months, and liabilities of kr.972.0m due beyond 12 months. On the other hand, it had cash of kr.420.0m and kr.909.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.797.0m.

Of course, ALK-Abelló has a market capitalization of kr.34.5b, 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. Despite its noteworthy liabilities, ALK-Abelló boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that ALK-Abelló has boosted its EBIT by 73%, thus reducing the spectre of future debt repayments. 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 ALK-Abelló'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ALK-Abelló 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, ALK-Abelló's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that ALK-Abelló has kr.226.0m in net cash. And we liked the look of last year's 73% year-on-year EBIT growth. So is ALK-Abelló's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in ALK-Abelló would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.