Trelleborg (STO:TREL B) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Trelleborg AB (publ) (STO:TREL B) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Trelleborg

How Much Debt Does Trelleborg Carry?

You can click the graphic below for the historical numbers, but it shows that Trelleborg had kr6.94b of debt in September 2023, down from kr12.3b, one year before. However, it does have kr10.6b in cash offsetting this, leading to net cash of kr3.62b.

How Healthy Is Trelleborg's Balance Sheet?

We can see from the most recent balance sheet that Trelleborg had liabilities of kr9.49b falling due within a year, and liabilities of kr9.80b due beyond that. On the other hand, it had cash of kr10.6b and kr8.84b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Trelleborg's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr82.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Trelleborg has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Trelleborg grew its EBIT by 15% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Trelleborg's ability to maintain a healthy balance sheet going forward. 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. While Trelleborg 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, Trelleborg actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Trelleborg has kr3.62b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of kr29b, being 269% of its EBIT. So we don't think Trelleborg's use of debt is risky. 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. For example Trelleborg has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.