Does Betsson (STO:BETS B) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Betsson AB (publ) (STO:BETS B) makes use of debt. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Betsson

What Is Betsson's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Betsson had debt of €172.9m, up from €98.5m in one year. However, its balance sheet shows it holds €240.5m in cash, so it actually has €67.6m net cash.

How Strong Is Betsson's Balance Sheet?

We can see from the most recent balance sheet that Betsson had liabilities of €284.5m falling due within a year, and liabilities of €183.8m due beyond that. Offsetting these obligations, it had cash of €240.5m as well as receivables valued at €217.0m due within 12 months. So its liabilities total €10.8m more than the combination of its cash and short-term receivables.

Having regard to Betsson's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €1.30b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Betsson also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Betsson saw its EBIT drop by 3.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Betsson 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Betsson 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 last three years, Betsson actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Betsson's liabilities, but we can be reassured by the fact it has has net cash of €67.6m. And it impressed us with free cash flow of €218m, being 103% of its EBIT. So is Betsson's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Betsson you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.