Crayon Group Holding (OB:CRAYN) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Crayon Group Holding ASA (OB:CRAYN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Crayon Group Holding

What Is Crayon Group Holding's Net Debt?

As you can see below, at the end of December 2020, Crayon Group Holding had kr371.1m of debt, up from kr354.0m a year ago. Click the image for more detail. But on the other hand it also has kr1.39b in cash, leading to a kr1.02b net cash position.

How Strong Is Crayon Group Holding's Balance Sheet?

The latest balance sheet data shows that Crayon Group Holding had liabilities of kr4.75b due within a year, and liabilities of kr459.6m falling due after that. Offsetting these obligations, it had cash of kr1.39b as well as receivables valued at kr3.66b due within 12 months. So it has liabilities totalling kr160.6m 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 kr11.3b 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 41% 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Crayon Group Holding's liabilities, but we can be reassured by the fact it has has net cash of kr1.02b. And it impressed us with free cash flow of kr860m, being 208% of its EBIT. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Crayon Group Holding that you should be aware of.

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. 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.
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