ScandBook Holding (STO:SBOK) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that ScandBook Holding AB (publ) (STO:SBOK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 ScandBook Holding

What Is ScandBook Holding's Net Debt?

As you can see below, ScandBook Holding had kr41.4m of debt at March 2021, down from kr56.8m a year prior. But it also has kr43.5m in cash to offset that, meaning it has kr2.13m net cash.

How Strong Is ScandBook Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ScandBook Holding had liabilities of kr53.3m due within 12 months and liabilities of kr40.8m due beyond that. Offsetting this, it had kr43.5m in cash and kr47.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr3.08m.

Having regard to ScandBook Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr162.7m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, ScandBook Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that ScandBook Holding grew its EBIT by 163% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ScandBook Holding will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ScandBook Holding 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. Happily for any shareholders, ScandBook Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about ScandBook Holding's liabilities, but we can be reassured by the fact it has has net cash of kr2.13m. And it impressed us with free cash flow of kr36m, being 221% of its EBIT. So is ScandBook Holding'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. Case in point: We've spotted 2 warning signs for ScandBook Holding you should be aware of.

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.
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