Is Nilörngruppen (STO:NIL B) Using Too Much Debt?

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.' 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 can see that Nilörngruppen AB (STO:NIL B) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Nilörngruppen

How Much Debt Does Nilörngruppen Carry?

The image below, which you can click on for greater detail, shows that Nilörngruppen had debt of kr41.2m at the end of September 2021, a reduction from kr58.1m over a year. But on the other hand it also has kr99.8m in cash, leading to a kr58.6m net cash position.

How Strong Is Nilörngruppen's Balance Sheet?

According to the last reported balance sheet, Nilörngruppen had liabilities of kr219.3m due within 12 months, and liabilities of kr54.3m due beyond 12 months. Offsetting these obligations, it had cash of kr99.8m as well as receivables valued at kr108.7m due within 12 months. So it has liabilities totalling kr65.0m more than its cash and near-term receivables, combined.

Of course, Nilörngruppen has a market capitalization of kr946.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Nilörngruppen boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Nilörngruppen grew its EBIT by 248% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, Nilörngruppen recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Nilörngruppen's liabilities, but we can be reassured by the fact it has has net cash of kr58.6m. And we liked the look of last year's 248% year-on-year EBIT growth. So we don't think Nilörngruppen's use of debt is risky. 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. We've identified 2 warning signs with Nilörngruppen (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.