Health Check: How Prudently Does ByggPartner Gruppen (STO:BYGGP) Use Debt?

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. Importantly, ByggPartner Gruppen AB (publ) (STO:BYGGP) does carry debt. But should shareholders be worried about its use of debt?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ByggPartner Gruppen

What Is ByggPartner Gruppen's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 ByggPartner Gruppen had kr200.0m of debt, an increase on none, over one year. However, it also had kr196.4m in cash, and so its net debt is kr3.63m.

How Healthy Is ByggPartner Gruppen's Balance Sheet?

We can see from the most recent balance sheet that ByggPartner Gruppen had liabilities of kr1.49b falling due within a year, and liabilities of kr164.4m due beyond that. Offsetting these obligations, it had cash of kr196.4m as well as receivables valued at kr911.4m due within 12 months. So its liabilities total kr546.9m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of kr597.3m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Carrying virtually no net debt, ByggPartner Gruppen has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is ByggPartner Gruppen'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.

Over 12 months, ByggPartner Gruppen reported revenue of kr3.2b, which is a gain of 52%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, ByggPartner Gruppen still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr55m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through kr22m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with ByggPartner Gruppen (at least 2 which are concerning) , and understanding them should be part of your investment process.

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.