Aker Solutions (OB:AKSO) Seems To Use Debt Quite Sensibly

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. Importantly, Aker Solutions ASA (OB:AKSO) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Aker Solutions

What Is Aker Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that Aker Solutions had kr1.95b of debt in June 2022, down from kr2.62b, one year before. But on the other hand it also has kr5.03b in cash, leading to a kr3.07b net cash position.

A Look At Aker Solutions' Liabilities

According to the last reported balance sheet, Aker Solutions had liabilities of kr15.8b due within 12 months, and liabilities of kr6.42b due beyond 12 months. On the other hand, it had cash of kr5.03b and kr9.66b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr7.52b.

This is a mountain of leverage relative to its market capitalization of kr11.6b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Aker Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Aker Solutions improved its EBIT from a last year's loss to a positive kr1.1b. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Aker Solutions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Aker Solutions 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 year, Aker Solutions actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Aker Solutions does have more liabilities than liquid assets, it also has net cash of kr3.07b. And it impressed us with free cash flow of kr3.2b, being 302% of its EBIT. So we are not troubled with Aker Solutions's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Aker Solutions, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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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.