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.' 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 should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt 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 kr426.0m at the end of September 2023, a reduction from kr1.00b over a year. However, its balance sheet shows it holds kr7.79b in cash, so it actually has kr7.36b 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 kr22.7b due within 12 months and liabilities of kr5.37b due beyond that. Offsetting these obligations, it had cash of kr7.79b as well as receivables valued at kr12.7b due within 12 months. So its liabilities total kr7.54b more than the combination of its cash and short-term receivables.

Aker Solutions has a market capitalization of kr19.5b, so it could very likely raise cash to ameliorate 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!

Better yet, Aker Solutions grew its EBIT by 137% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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. Over the last two years, Aker Solutions actually produced more free cash flow than EBIT. 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 kr7.36b. The cherry on top was that in converted 190% of that EBIT to free cash flow, bringing in kr5.7b. So we don't think Aker Solutions's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Aker Solutions has 1 warning sign we think 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.