Does AB Electrolux (STO:ELUX B) Have A Healthy Balance Sheet?

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.' 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. As with many other companies AB Electrolux (publ) (STO:ELUX B) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for AB Electrolux

How Much Debt Does AB Electrolux Carry?

The image below, which you can click on for greater detail, shows that AB Electrolux had debt of kr15.6b at the end of September 2021, a reduction from kr16.9b over a year. But it also has kr18.1b in cash to offset that, meaning it has kr2.56b net cash.

How Healthy Is AB Electrolux's Balance Sheet?

We can see from the most recent balance sheet that AB Electrolux had liabilities of kr70.6b falling due within a year, and liabilities of kr21.0b due beyond that. On the other hand, it had cash of kr18.1b and kr21.8b worth of receivables due within a year. So its liabilities total kr51.6b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of kr60.6b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, AB Electrolux also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that AB Electrolux has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine AB Electrolux'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. AB Electrolux 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. During the last three years, AB Electrolux produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although AB Electrolux's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr2.56b. And we liked the look of last year's 49% year-on-year EBIT growth. So we are not troubled with AB Electrolux's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that AB Electrolux insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.