AF Gruppen (OB:AFG) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that AF Gruppen ASA (OB:AFG) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for AF Gruppen

How Much Debt Does AF Gruppen Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 AF Gruppen had kr508.0m of debt, an increase on kr144.0m, over one year. But it also has kr765.0m in cash to offset that, meaning it has kr257.0m net cash.

How Healthy Is AF Gruppen's Balance Sheet?

We can see from the most recent balance sheet that AF Gruppen had liabilities of kr9.71b falling due within a year, and liabilities of kr1.25b due beyond that. Offsetting these obligations, it had cash of kr765.0m as well as receivables valued at kr5.60b due within 12 months. So it has liabilities totalling kr4.60b more than its cash and near-term receivables, combined.

AF Gruppen has a market capitalization of kr16.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, AF Gruppen also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that AF Gruppen has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AF Gruppen 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While AF Gruppen 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, AF Gruppen generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although AF Gruppen's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr257.0m. And it impressed us with free cash flow of kr1.5b, being 96% of its EBIT. So we don't have any problem with AF Gruppen'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 1 warning sign for AF Gruppen 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.