AF Gruppen (OB:AFG) Seems To Use Debt Rather Sparingly

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.' 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. We can see that AF Gruppen ASA (OB:AFG) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for AF Gruppen

What Is AF Gruppen's Debt?

You can click the graphic below for the historical numbers, but it shows that AF Gruppen had kr167.0m of debt in March 2021, down from kr215.0m, one year before. However, its balance sheet shows it holds kr630.0m in cash, so it actually has kr463.0m net cash.

A Look At AF Gruppen's Liabilities

Zooming in on the latest balance sheet data, we can see that AF Gruppen had liabilities of kr7.98b due within 12 months and liabilities of kr1.40b due beyond that. Offsetting this, it had kr630.0m in cash and kr4.26b in receivables that were due within 12 months. So it has liabilities totalling kr4.49b more than its cash and near-term receivables, combined.

This deficit isn't so bad because AF Gruppen is worth kr19.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, AF Gruppen boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that AF Gruppen grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AF Gruppen can strengthen its balance sheet over time. 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 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. Over the last three years, AF Gruppen recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While AF Gruppen does have more liabilities than liquid assets, it also has net cash of kr463.0m. And it impressed us with free cash flow of kr676m, being 82% of its EBIT. So is AF Gruppen'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that AF Gruppen is showing 1 warning sign in our investment analysis , you should know about...

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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