We Think Cedergrenska (STO:CEDER) Can Stay On Top Of Its 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Cedergrenska AB (publ) (STO:CEDER) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Cedergrenska

What Is Cedergrenska's Debt?

You can click the graphic below for the historical numbers, but it shows that Cedergrenska had kr33.8m of debt in September 2024, down from kr50.9m, one year before. But on the other hand it also has kr41.6m in cash, leading to a kr7.83m net cash position.

A Look At Cedergrenska's Liabilities

Zooming in on the latest balance sheet data, we can see that Cedergrenska had liabilities of kr152.2m due within 12 months and liabilities of kr22.2m due beyond that. On the other hand, it had cash of kr41.6m and kr27.8m worth of receivables due within a year. So it has liabilities totalling kr105.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Cedergrenska has a market capitalization of kr378.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Cedergrenska also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Cedergrenska made a loss at the EBIT level, last year, it was also good to see that it generated kr25m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Cedergrenska's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last year, Cedergrenska 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

While Cedergrenska does have more liabilities than liquid assets, it also has net cash of kr7.83m. And it impressed us with free cash flow of kr66m, being 261% of its EBIT. So we are not troubled with Cedergrenska's debt use. 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. For instance, we've identified 2 warning signs for Cedergrenska (1 makes us a bit uncomfortable) you should be aware of.

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.