Is AB Electrolux (STO:ELUX B) Weighed On By Its Debt Load?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that AB Electrolux (publ) (STO:ELUX B) 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 AB Electrolux

How Much Debt Does AB Electrolux Carry?

The image below, which you can click on for greater detail, shows that at March 2023 AB Electrolux had debt of kr37.6b, up from kr20.5b in one year. On the flip side, it has kr11.7b in cash leading to net debt of about kr25.9b.

How Healthy Is AB Electrolux's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AB Electrolux had liabilities of kr68.5b due within 12 months and liabilities of kr38.2b due beyond that. On the other hand, it had cash of kr11.7b and kr23.8b worth of receivables due within a year. So it has liabilities totalling kr71.3b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the kr41.3b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, AB Electrolux would likely require a major re-capitalisation if it had to pay its creditors today. 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 AB Electrolux's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, AB Electrolux reported revenue of kr137b, which is a gain of 8.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months AB Electrolux produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at kr1.6b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through kr9.5b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with AB Electrolux , and understanding them should be part of your investment process.

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.

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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.