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. We can see that Crayon Group Holding ASA (OB:CRAYN) does use debt in its business. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Crayon Group Holding's Debt?
As you can see below, at the end of March 2021, Crayon Group Holding had kr407.3m of debt, up from kr357.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr962.1m in cash, so it actually has kr554.8m net cash.
A Look At Crayon Group Holding's Liabilities
The latest balance sheet data shows that Crayon Group Holding had liabilities of kr4.12b due within a year, and liabilities of kr447.7m falling due after that. On the other hand, it had cash of kr962.1m and kr3.49b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr118.1m.
This state of affairs indicates that Crayon Group Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the kr12.2b company is short on cash, but still worth keeping an eye on the 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 70% 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're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Crayon Group Holding 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. 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.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Crayon Group Holding has kr554.8m in net cash. And it impressed us with free cash flow of kr347m, being 162% 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. Case in point: We've spotted 1 warning sign for Crayon Group Holding 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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