These 4 Measures Indicate That Saab (STO:SAAB B) Is Using Debt Safely

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.' 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. We note that Saab AB (publ) (STO:SAAB B) does have debt on its balance sheet. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Saab

How Much Debt Does Saab Carry?

You can click the graphic below for the historical numbers, but it shows that Saab had kr6.95b of debt in June 2023, down from kr8.59b, one year before. However, it does have kr13.7b in cash offsetting this, leading to net cash of kr6.78b.

How Healthy Is Saab's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Saab had liabilities of kr32.9b due within 12 months and liabilities of kr13.6b due beyond that. Offsetting these obligations, it had cash of kr13.7b as well as receivables valued at kr19.7b due within 12 months. So it has liabilities totalling kr13.1b more than its cash and near-term receivables, combined.

Of course, Saab has a market capitalization of kr74.4b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Saab boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Saab has been able to increase its EBIT by 29% in twelve months, making it easier to pay down 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 Saab 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, a company can only pay off debt with cold hard cash, not accounting profits. While Saab 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. Happily for any shareholders, Saab actually produced more free cash flow than EBIT over the last three years. 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 Saab does have more liabilities than liquid assets, it also has net cash of kr6.78b. And it impressed us with free cash flow of kr3.7b, being 123% of its EBIT. So is Saab's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Saab would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.