MilDef Group (STO:MILDEF) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies MilDef Group AB (publ) (STO:MILDEF) makes use of debt. But the more important question is: how much risk is that debt creating?

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is MilDef Group's Net Debt?

As you can see below, MilDef Group had kr133.9m of debt at December 2024, down from kr263.9m a year prior. However, its balance sheet shows it holds kr530.4m in cash, so it actually has kr396.5m net cash.

How Strong Is MilDef Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MilDef Group had liabilities of kr393.9m due within 12 months and liabilities of kr188.1m due beyond that. On the other hand, it had cash of kr530.4m and kr417.5m worth of receivables due within a year. So it can boast kr365.9m more liquid assets than total liabilities.

This surplus suggests that MilDef Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MilDef Group has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for MilDef Group

Fortunately, MilDef Group grew its EBIT by 5.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MilDef Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While MilDef Group 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, MilDef Group reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case MilDef Group has kr396.5m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 5.8% over the last year. So we don't have any problem with MilDef Group's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for MilDef Group you should know about.

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.

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.