Is ALK-Abelló (CPH:ALK B) Using Too Much Debt?

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.' 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. As with many other companies ALK-Abelló A/S (CPH:ALK B) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ALK-Abelló

What Is ALK-Abelló's Net Debt?

As you can see below, ALK-Abelló had kr.199.0m of debt at March 2024, down from kr.366.0m a year prior. However, it does have kr.291.0m in cash offsetting this, leading to net cash of kr.92.0m.

How Strong Is ALK-Abelló's Balance Sheet?

The latest balance sheet data shows that ALK-Abelló had liabilities of kr.1.11b due within a year, and liabilities of kr.981.0m falling due after that. Offsetting these obligations, it had cash of kr.291.0m as well as receivables valued at kr.950.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.853.0m.

Given ALK-Abelló has a market capitalization of kr.32.1b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ALK-Abelló also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, ALK-Abelló grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ALK-Abelló 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. In the last three years, ALK-Abelló's free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that ALK-Abelló has kr.92.0m in net cash. And it impressed us with its EBIT growth of 56% over the last year. So is ALK-Abelló's debt a risk? It doesn't seem so to us. We'd be very excited to see if ALK-Abelló insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

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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.

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