These 4 Measures Indicate That Aker Solutions (OB:AKSO) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

What Is Aker Solutions's Net Debt?

As you can see below, Aker Solutions had kr423.0m of debt at June 2023, down from kr1.95b a year prior. But it also has kr8.08b in cash to offset that, meaning it has kr7.66b net cash.

A Look At Aker Solutions' Liabilities

According to the last reported balance sheet, Aker Solutions had liabilities of kr21.8b due within 12 months, and liabilities of kr5.93b due beyond 12 months. Offsetting this, it had kr8.08b in cash and kr12.0b in receivables that were due within 12 months. So it has liabilities totalling kr7.56b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Aker Solutions is worth kr23.4b, 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. 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 143% over twelve months. 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 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 two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Aker Solutions does have more liabilities than liquid assets, it also has net cash of kr7.66b. And it impressed us with free cash flow of kr5.3b, being 235% of its EBIT. So we don't think Aker Solutions's use of debt is risky. 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.