Is KABE Group AB (publ.) (STO:KABE B) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, KABE Group AB (publ.) (STO:KABE B) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for KABE Group AB (publ.)

What Is KABE Group AB (publ.)'s Debt?

You can click the graphic below for the historical numbers, but it shows that KABE Group AB (publ.) had kr82.0m of debt in June 2022, down from kr144.0m, one year before. But on the other hand it also has kr520.0m in cash, leading to a kr438.0m net cash position.

A Look At KABE Group AB (publ.)'s Liabilities

According to the last reported balance sheet, KABE Group AB (publ.) had liabilities of kr833.0m due within 12 months, and liabilities of kr141.0m due beyond 12 months. Offsetting this, it had kr520.0m in cash and kr450.0m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to KABE Group AB (publ.)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr1.70b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, KABE Group AB (publ.) also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that KABE Group AB (publ.) has boosted its EBIT by 57%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is KABE Group AB (publ.)'s earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While KABE Group AB (publ.) 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. Over the last three years, KABE Group AB (publ.) actually produced more free cash flow than EBIT. 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 KABE Group AB (publ.) has kr438.0m in net cash. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in kr139m. So is KABE Group AB (publ.)'s debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for KABE Group AB (publ.) 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.

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.