These 4 Measures Indicate That Veidekke (OB:VEI) Is Using Debt Reasonably Well

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.' 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. As with many other companies Veidekke ASA (OB:VEI) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Veidekke

How Much Debt Does Veidekke Carry?

You can click the graphic below for the historical numbers, but it shows that Veidekke had kr411.0m of debt in March 2022, down from kr814.0m, one year before. But it also has kr3.67b in cash to offset that, meaning it has kr3.26b net cash.

How Healthy Is Veidekke's Balance Sheet?

According to the last reported balance sheet, Veidekke had liabilities of kr10.8b due within 12 months, and liabilities of kr2.88b due beyond 12 months. On the other hand, it had cash of kr3.67b and kr5.84b worth of receivables due within a year. So it has liabilities totalling kr4.20b more than its cash and near-term receivables, combined.

Veidekke has a market capitalization of kr13.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Veidekke boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Veidekke saw its EBIT drop by 2.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Veidekke'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 Veidekke 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, Veidekke actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Veidekke's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr3.26b. The cherry on top was that in converted 132% of that EBIT to free cash flow, bringing in kr1.6b. So we are not troubled with Veidekke's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Veidekke that 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.