Here's Why Nilörngruppen (STO:NIL B) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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. Importantly, Nilörngruppen AB (STO:NIL B) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Nilörngruppen

What Is Nilörngruppen's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nilörngruppen had kr29.2m of debt in December 2020, down from kr66.2m, one year before. However, its balance sheet shows it holds kr54.1m in cash, so it actually has kr24.8m net cash.

How Strong Is Nilörngruppen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nilörngruppen had liabilities of kr144.4m due within 12 months and liabilities of kr54.9m due beyond that. On the other hand, it had cash of kr54.1m and kr72.0m worth of receivables due within a year. So it has liabilities totalling kr73.2m more than its cash and near-term receivables, combined.

Given Nilörngruppen has a market capitalization of kr654.5m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Nilörngruppen also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Nilörngruppen's load is not too heavy, because its EBIT was down 21% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Nilörngruppen'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Nilörngruppen 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. During the last three years, Nilörngruppen produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While Nilörngruppen does have more liabilities than liquid assets, it also has net cash of kr24.8m. So we are not troubled with Nilörngruppen's debt use. 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. Be aware that Nilörngruppen is showing 3 warning signs in our investment analysis , you should know about...

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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