Does Arendals Fossekompani (OB:AFK) 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.' 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, Arendals Fossekompani ASA (OB:AFK) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

See our latest analysis for Arendals Fossekompani

What Is Arendals Fossekompani's Debt?

You can click the graphic below for the historical numbers, but it shows that Arendals Fossekompani had kr909.0m of debt in March 2022, down from kr1.81b, one year before. But it also has kr2.98b in cash to offset that, meaning it has kr2.07b net cash.

How Healthy Is Arendals Fossekompani's Balance Sheet?

The latest balance sheet data shows that Arendals Fossekompani had liabilities of kr2.09b due within a year, and liabilities of kr1.01b falling due after that. On the other hand, it had cash of kr2.98b and kr1.03b worth of receivables due within a year. So it actually has kr906.0m more liquid assets than total liabilities.

This surplus suggests that Arendals Fossekompani has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Arendals Fossekompani boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Arendals Fossekompani grew its EBIT by 139% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Arendals Fossekompani'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Arendals Fossekompani 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, Arendals Fossekompani generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Arendals Fossekompani has kr2.07b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in kr798m. So we don't think Arendals Fossekompani's use of debt is risky. 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. For instance, we've identified 2 warning signs for Arendals Fossekompani (1 is a bit concerning) you should be aware of.

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.