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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Saab AB (publ) (STO:SAAB B) makes use of debt. But the more important question is: how much risk is that debt creating?

Our free stock report includes 1 warning sign investors should be aware of before investing in Saab. Read for free now.

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Saab's Debt?

As you can see below, at the end of December 2024, Saab had kr7.36b of debt, up from kr7.05b a year ago. Click the image for more detail. But it also has kr11.9b in cash to offset that, meaning it has kr4.57b net cash.

How Strong Is Saab's Balance Sheet?

According to the last reported balance sheet, Saab had liabilities of kr49.7b due within 12 months, and liabilities of kr14.3b due beyond 12 months. Offsetting these obligations, it had cash of kr11.9b as well as receivables valued at kr27.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr24.4b.

Since publicly traded Saab shares are worth a very impressive total of kr228.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Saab also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Saab

Also positive, Saab grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Saab 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Saab 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, Saab's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Saab's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr4.57b. And we liked the look of last year's 21% year-on-year EBIT growth. So is Saab's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Saab is showing 1 warning sign in our investment analysis , 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.

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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.