These 4 Measures Indicate That Cedergrenska (STO:CEDER) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Cedergrenska AB (publ) (STO:CEDER) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Cedergrenska

What Is Cedergrenska's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Cedergrenska had kr25.1m of debt in June 2024, down from kr49.7m, one year before. However, it does have kr61.7m in cash offsetting this, leading to net cash of kr36.6m.

How Healthy Is Cedergrenska's Balance Sheet?

According to the last reported balance sheet, Cedergrenska had liabilities of kr143.9m due within 12 months, and liabilities of kr17.5m due beyond 12 months. On the other hand, it had cash of kr61.7m and kr17.9m worth of receivables due within a year. So its liabilities total kr81.9m more than the combination of its cash and short-term receivables.

Cedergrenska has a market capitalization of kr306.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Cedergrenska boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Cedergrenska grew its EBIT by 2,346% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cedergrenska will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Cedergrenska may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Cedergrenska 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 Cedergrenska does have more liabilities than liquid assets, it also has net cash of kr36.6m. The cherry on top was that in converted 271% of that EBIT to free cash flow, bringing in kr68m. So we don't think Cedergrenska's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Cedergrenska you should be aware of, and 1 of them can't be ignored.

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.