Aker Solutions (OB:AKSO) Seems To Use Debt Rather Sparingly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Aker Solutions ASA (OB:AKSO) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. 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 Aker Solutions

How Much Debt Does Aker Solutions Carry?

The image below, which you can click on for greater detail, shows that Aker Solutions had debt of kr506.0m at the end of March 2023, a reduction from kr1.87b over a year. But it also has kr7.10b in cash to offset that, meaning it has kr6.60b net cash.

How Strong Is Aker Solutions' Balance Sheet?

We can see from the most recent balance sheet that Aker Solutions had liabilities of kr20.5b falling due within a year, and liabilities of kr5.79b due beyond that. Offsetting these obligations, it had cash of kr7.10b as well as receivables valued at kr12.0b due within 12 months. So it has liabilities totalling kr7.15b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Aker Solutions has a market capitalization of kr18.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Aker Solutions also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Aker Solutions grew its EBIT by 177% 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 ultimately the future profitability of the business will decide if Aker Solutions can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Aker Solutions's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr6.60b. And it impressed us with free cash flow of kr3.8b, being 256% of its EBIT. So is Aker Solutions's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Aker Solutions would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.