David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Byggma ASA (OB:BMA) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Byggma's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Byggma had kr473.4m of debt in March 2021, down from kr540.1m, one year before. But on the other hand it also has kr494.0m in cash, leading to a kr20.6m net cash position.
How Healthy Is Byggma's Balance Sheet?
According to the last reported balance sheet, Byggma had liabilities of kr564.6m due within 12 months, and liabilities of kr532.7m due beyond 12 months. On the other hand, it had cash of kr494.0m and kr419.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr183.8m.
Given Byggma has a market capitalization of kr2.21b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Byggma also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that Byggma grew its EBIT by 112% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Byggma will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Byggma 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, Byggma's free cash flow amounted to 26% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
We could understand if investors are concerned about Byggma's liabilities, but we can be reassured by the fact it has has net cash of kr20.6m. And we liked the look of last year's 112% year-on-year EBIT growth. So is Byggma's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Byggma has 4 warning signs we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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