Kopparbergs Bryggeri (NGM:KOBR B) Has A Rock Solid Balance Sheet

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 Kopparbergs Bryggeri AB (publ) (NGM:KOBR B) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kopparbergs Bryggeri

How Much Debt Does Kopparbergs Bryggeri Carry?

The image below, which you can click on for greater detail, shows that Kopparbergs Bryggeri had debt of kr12.3m at the end of September 2020, a reduction from kr31.5m over a year. However, its balance sheet shows it holds kr407.0m in cash, so it actually has kr394.7m net cash.

A Look At Kopparbergs Bryggeri's Liabilities

The latest balance sheet data shows that Kopparbergs Bryggeri had liabilities of kr975.3m due within a year, and liabilities of kr43.4m falling due after that. On the other hand, it had cash of kr407.0m and kr651.6m worth of receivables due within a year. So it can boast kr39.9m more liquid assets than total liabilities.

This state of affairs indicates that Kopparbergs Bryggeri's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the kr3.49b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Kopparbergs Bryggeri has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Kopparbergs Bryggeri has increased its EBIT by 5.6% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kopparbergs Bryggeri 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. While Kopparbergs Bryggeri 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. During the last three years, Kopparbergs Bryggeri generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Kopparbergs Bryggeri has net cash of kr394.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of kr502m, being 98% of its EBIT. So we don't think Kopparbergs Bryggeri's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Kopparbergs Bryggeri (1 is a bit concerning) 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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