Is Aker Solutions (OB:AKSO) A Risky Investment?

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 is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

View 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 kr2.37b of debt in December 2021, down from kr2.75b, one year before. But it also has kr4.56b in cash to offset that, meaning it has kr2.19b net cash.

How Strong Is Aker Solutions' Balance Sheet?

The latest balance sheet data shows that Aker Solutions had liabilities of kr14.7b due within a year, and liabilities of kr6.33b falling due after that. Offsetting these obligations, it had cash of kr4.56b as well as receivables valued at kr8.60b due within 12 months. So it has liabilities totalling kr7.85b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Aker Solutions is worth kr16.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Aker Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Aker Solutions made a loss at the EBIT level, last year, but improved that to positive EBIT of kr612m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Aker Solutions 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. Happily for any shareholders, Aker Solutions actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 kr2.19b. And it impressed us with free cash flow of kr2.4b, being 398% of its EBIT. So we are not troubled with Aker Solutions'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 example, we've discovered 1 warning sign for Aker Solutions that you should be aware of before investing here.

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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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.