Does OKEA (OB:OKEA) Have A Healthy Balance Sheet?

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 OKEA ASA (OB:OKEA) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for OKEA

How Much Debt Does OKEA Carry?

As you can see below, OKEA had kr1.81b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have kr2.35b in cash offsetting this, leading to net cash of kr533.2m.

How Healthy Is OKEA's Balance Sheet?

According to the last reported balance sheet, OKEA had liabilities of kr3.76b due within 12 months, and liabilities of kr9.94b due beyond 12 months. On the other hand, it had cash of kr2.35b and kr1.20b worth of receivables due within a year. So it has liabilities totalling kr10.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the kr3.36b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, OKEA would likely require a major re-capitalisation if it had to pay its creditors today. OKEA boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

In fact OKEA's saving grace is its low debt levels, because its EBIT has tanked 39% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 OKEA'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. OKEA 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. During the last three years, OKEA produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While OKEA does have more liabilities than liquid assets, it also has net cash of kr533.2m. And it impressed us with free cash flow of kr1.8b, being 79% of its EBIT. Despite the cash, we do find OKEA's level of total liabilities concerning, so we're not particularly comfortable with the stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for OKEA that you should be aware of.

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.

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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.