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

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 Aker Solutions ASA (OB:AKSO) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Aker Solutions

What Is Aker Solutions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Aker Solutions had kr1.00b of debt in September 2022, down from kr2.40b, one year before. But it also has kr4.47b in cash to offset that, meaning it has kr3.47b net cash.

A Look At Aker Solutions' Liabilities

Zooming in on the latest balance sheet data, we can see that Aker Solutions had liabilities of kr16.0b due within 12 months and liabilities of kr6.18b due beyond that. Offsetting these obligations, it had cash of kr4.47b as well as receivables valued at kr10.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr7.29b.

While this might seem like a lot, it is not so bad since Aker Solutions has a market capitalization of kr17.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Aker Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Aker Solutions turned things around in the last 12 months, delivering and EBIT of kr1.4b. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, Aker Solutions actually produced more free cash flow than EBIT over the last year. 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 kr3.47b. And it impressed us with free cash flow of kr3.3b, being 235% of its EBIT. So we are not troubled with Aker Solutions's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Aker Solutions insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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. 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.