These 4 Measures Indicate That Loomis (STO:LOOMIS) 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.' 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 Loomis AB (publ) (STO:LOOMIS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Loomis

How Much Debt Does Loomis Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Loomis had kr7.21b of debt, an increase on kr6.25b, over one year. But on the other hand it also has kr9.13b in cash, leading to a kr1.91b net cash position.

How Strong Is Loomis' Balance Sheet?

We can see from the most recent balance sheet that Loomis had liabilities of kr11.0b falling due within a year, and liabilities of kr12.6b due beyond that. Offsetting this, it had kr9.13b in cash and kr4.26b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr10.3b.

Loomis has a market capitalization of kr20.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Loomis boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Loomis grew its EBIT by 20% last year, making its debt load easier to handle. 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 Loomis 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 company can only pay off debt with cold hard cash, not accounting profits. Loomis 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, Loomis recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Loomis does have more liabilities than liquid assets, it also has net cash of kr1.91b. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in kr2.4b. So we don't have any problem with Loomis's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Loomis .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.