Axfood (STO:AXFO) Could Easily Take On More Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Axfood AB (publ) (STO:AXFO) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Axfood

How Much Debt Does Axfood Carry?

As you can see below, Axfood had kr759.0m of debt at March 2024, down from kr1.50b a year prior. But on the other hand it also has kr817.0m in cash, leading to a kr58.0m net cash position.

How Healthy Is Axfood's Balance Sheet?

According to the last reported balance sheet, Axfood had liabilities of kr15.3b due within 12 months, and liabilities of kr9.42b due beyond 12 months. Offsetting this, it had kr817.0m in cash and kr2.24b in receivables that were due within 12 months. So its liabilities total kr21.7b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Axfood is worth kr63.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Axfood also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Axfood has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Axfood can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Axfood 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. Happily for any shareholders, Axfood actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Axfood does have more liabilities than liquid assets, it also has net cash of kr58.0m. And it impressed us with free cash flow of kr5.3b, being 113% of its EBIT. So is Axfood's debt a risk? It doesn't seem so to us. We'd be very excited to see if Axfood insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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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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.