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.' 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. Importantly, KABE Group AB (publ.) (STO:KABE B) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

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

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

As you can see below, at the end of September 2023, KABE Group AB (publ.) had kr83.0m of debt, up from kr74.0m a year ago. Click the image for more detail. However, it does have kr472.0m in cash offsetting this, leading to net cash of kr389.0m.

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

The latest balance sheet data shows that KABE Group AB (publ.) had liabilities of kr785.0m due within a year, and liabilities of kr148.0m falling due after that. Offsetting these obligations, it had cash of kr472.0m as well as receivables valued at kr444.0m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that KABE Group AB (publ.)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the kr3.24b 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.

The good news is that KABE Group AB (publ.) has increased its EBIT by 5.6% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since KABE Group AB (publ.) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. KABE Group AB (publ.) 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, KABE Group AB (publ.) produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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 kr389.0m in net cash. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for KABE Group AB (publ.) (1 is significant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.