We Think ICA Gruppen (STO:ICA) Can Stay On Top Of Its Debt

By
Simply Wall St
Published
June 28, 2021
OM:ICA
Source: Shutterstock

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. As with many other companies ICA Gruppen AB (publ) (STO:ICA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for ICA Gruppen

What Is ICA Gruppen's Net Debt?

The image below, which you can click on for greater detail, shows that ICA Gruppen had debt of kr6.55b at the end of March 2021, a reduction from kr7.18b over a year. However, it does have kr6.44b in cash offsetting this, leading to net debt of about kr106.0m.

debt-equity-history-analysis
OM:ICA Debt to Equity History June 29th 2021

How Healthy Is ICA Gruppen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ICA Gruppen had liabilities of kr45.0b due within 12 months and liabilities of kr25.0b due beyond that. Offsetting these obligations, it had cash of kr6.44b as well as receivables valued at kr3.10b due within 12 months. So its liabilities total kr60.5b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of kr79.5b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. But either way, ICA Gruppen has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

ICA Gruppen has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.015 and EBIT of 12.6 times the interest expense. So relative to past earnings, the debt load seems trivial. The good news is that ICA Gruppen has increased its EBIT by 4.4% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ICA Gruppen 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. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, ICA Gruppen actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, ICA Gruppen's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its level of total liabilities does undermine this impression a bit. Looking at all the aforementioned factors together, it strikes us that ICA Gruppen can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for ICA Gruppen that you should be aware of.

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. 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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