Crayon Group Holding (OB:CRAYN) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Crayon Group Holding ASA (OB:CRAYN) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. 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.

See our latest analysis for Crayon Group Holding

How Much Debt Does Crayon Group Holding Carry?

As you can see below, at the end of September 2021, Crayon Group Holding had kr2.19b of debt, up from kr361.9m a year ago. Click the image for more detail. However, it does have kr2.58b in cash offsetting this, leading to net cash of kr391.2m.

How Strong Is Crayon Group Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Crayon Group Holding had liabilities of kr6.25b due within 12 months and liabilities of kr468.8m due beyond that. Offsetting this, it had kr2.58b in cash and kr3.87b in receivables that were due within 12 months. So it has liabilities totalling kr273.1m more than its cash and near-term receivables, combined.

Having regard to Crayon Group Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr15.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Crayon Group Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Crayon Group Holding grew its EBIT by 95% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Crayon Group Holding'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Crayon Group Holding 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, Crayon Group Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Crayon Group Holding has kr391.2m in net cash. The cherry on top was that in converted 133% of that EBIT to free cash flow, bringing in kr578m. So is Crayon Group Holding's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Crayon Group Holding is showing 1 warning sign in our investment analysis , you should know about...

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.