We Think Nilörngruppen (STO:NIL B) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Nilörngruppen AB (STO:NIL B) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 kr58.1m at the end of September 2020, a reduction from kr82.3m over a year. However, its balance sheet shows it holds kr62.2m in cash, so it actually has kr4.12m net cash.

How Strong Is Nilörngruppen's Balance Sheet?

We can see from the most recent balance sheet that Nilörngruppen had liabilities of kr212.7m falling due within a year, and liabilities of kr37.9m due beyond that. On the other hand, it had cash of kr62.2m and kr83.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr105.3m.

This deficit isn't so bad because Nilörngruppen is worth kr462.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Nilörngruppen boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Nilörngruppen's load is not too heavy, because its EBIT was down 50% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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. During the last three years, Nilörngruppen produced sturdy free cash flow equating to 57% 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 kr4.12m. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Nilörngruppen you should know about.

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. 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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