Does Svenska Cellulosa Aktiebolaget (STO:SCA B) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Svenska Cellulosa Aktiebolaget SCA (publ) (STO:SCA B) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Svenska Cellulosa Aktiebolaget

How Much Debt Does Svenska Cellulosa Aktiebolaget Carry?

You can click the graphic below for the historical numbers, but it shows that Svenska Cellulosa Aktiebolaget had kr9.48b of debt in September 2021, down from kr10.2b, one year before. On the flip side, it has kr1.12b in cash leading to net debt of about kr8.36b.

How Healthy Is Svenska Cellulosa Aktiebolaget's Balance Sheet?

According to the last reported balance sheet, Svenska Cellulosa Aktiebolaget had liabilities of kr6.36b due within 12 months, and liabilities of kr27.3b due beyond 12 months. On the other hand, it had cash of kr1.12b and kr3.70b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr28.8b.

Svenska Cellulosa Aktiebolaget has a very large market capitalization of kr108.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Svenska Cellulosa Aktiebolaget's net debt is only 1.4 times its EBITDA. And its EBIT easily covers its interest expense, being 49.0 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. It was also good to see that despite losing money on the EBIT line last year, Svenska Cellulosa Aktiebolaget turned things around in the last 12 months, delivering and EBIT of kr5.5b. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Svenska Cellulosa Aktiebolaget can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. In the last year, Svenska Cellulosa Aktiebolaget's free cash flow amounted to 30% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

On our analysis Svenska Cellulosa Aktiebolaget's interest cover should signal that it won't have too much trouble with its debt. But the other factors we noted above weren't so encouraging. For example, its conversion of EBIT to free cash flow makes us a little nervous about its debt. When we consider all the elements mentioned above, it seems to us that Svenska Cellulosa Aktiebolaget is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. Be aware that Svenska Cellulosa Aktiebolaget is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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. 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.