Is Volvo Car AB (publ.) (STO:VOLCAR B) A Risky Investment?

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. Importantly, Volvo Car AB (publ.) (STO:VOLCAR B) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Volvo Car AB (publ.)

What Is Volvo Car AB (publ.)'s Debt?

The chart below, which you can click on for greater detail, shows that Volvo Car AB (publ.) had kr29.5b in debt in December 2024; about the same as the year before. But on the other hand it also has kr56.4b in cash, leading to a kr26.9b net cash position.

How Healthy Is Volvo Car AB (publ.)'s Balance Sheet?

The latest balance sheet data shows that Volvo Car AB (publ.) had liabilities of kr169.6b due within a year, and liabilities of kr76.5b falling due after that. On the other hand, it had cash of kr56.4b and kr24.6b worth of receivables due within a year. So its liabilities total kr165.0b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the kr63.5b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Volvo Car AB (publ.) would likely require a major re-capitalisation if it had to pay its creditors today. Volvo Car AB (publ.) boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Volvo Car AB (publ.)'s EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Volvo Car AB (publ.) can strengthen its balance sheet over time. 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. Volvo Car 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. In the last three years, Volvo Car AB (publ.) created free cash flow amounting to 11% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although Volvo Car AB (publ.)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr26.9b. Despite the cash, we do find Volvo Car AB (publ.)'s level of total liabilities concerning, so we're not particularly comfortable with the stock. Given our hesitation about the stock, it would be good to know if Volvo Car AB (publ.) insiders have sold any shares recently. You click here to find out if insiders have sold recently.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.