Does BTS Group (STO:BTS B) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that BTS Group AB (publ) (STO:BTS B) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for BTS Group

What Is BTS Group's Net Debt?

As you can see below, at the end of December 2021, BTS Group had kr529.4m of debt, up from kr507.0m a year ago. Click the image for more detail. But on the other hand it also has kr594.4m in cash, leading to a kr65.0m net cash position.

How Strong Is BTS Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BTS Group had liabilities of kr979.1m due within 12 months and liabilities of kr529.4m due beyond that. On the other hand, it had cash of kr594.4m and kr556.9m worth of receivables due within a year. So it has liabilities totalling kr357.3m more than its cash and near-term receivables, combined.

Since publicly traded BTS Group shares are worth a total of kr7.04b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, BTS Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, BTS Group grew its EBIT by 295% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 BTS 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. BTS Group 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. Over the last three years, BTS Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about BTS Group's liabilities, but we can be reassured by the fact it has has net cash of kr65.0m. The cherry on top was that in converted 129% of that EBIT to free cash flow, bringing in kr291m. So is BTS Group'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for BTS Group you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.