These 4 Measures Indicate That Trelleborg (STO:TREL B) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Trelleborg AB (publ) (STO:TREL B) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Trelleborg

What Is Trelleborg's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Trelleborg had kr7.99b of debt in June 2023, down from kr10.9b, one year before. However, it does have kr11.6b in cash offsetting this, leading to net cash of kr3.64b.

How Strong Is Trelleborg's Balance Sheet?

According to the last reported balance sheet, Trelleborg had liabilities of kr10.5b due within 12 months, and liabilities of kr9.93b due beyond 12 months. Offsetting these obligations, it had cash of kr11.6b as well as receivables valued at kr8.98b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Trelleborg's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr69.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Trelleborg boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Trelleborg grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. 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 Trelleborg 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Trelleborg 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. Happily for any shareholders, Trelleborg actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Trelleborg has net cash of kr3.64b, as well as more liquid assets than liabilities. The cherry on top was that in converted 278% of that EBIT to free cash flow, bringing in kr30b. So is Trelleborg's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Trelleborg is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.

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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.