Is SSAB (STO:SSAB A) A Risky Investment?

Warren Buffett famously said, '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. We can see that SSAB AB (publ) (STO:SSAB A) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SSAB

How Much Debt Does SSAB Carry?

You can click the graphic below for the historical numbers, but it shows that SSAB had kr8.39b of debt in September 2022, down from kr11.1b, one year before. But it also has kr17.6b in cash to offset that, meaning it has kr9.26b net cash.

A Look At SSAB's Liabilities

We can see from the most recent balance sheet that SSAB had liabilities of kr33.8b falling due within a year, and liabilities of kr11.6b due beyond that. Offsetting this, it had kr17.6b in cash and kr16.9b in receivables that were due within 12 months. So its liabilities total kr10.8b more than the combination of its cash and short-term receivables.

Since publicly traded SSAB shares are worth a total of kr67.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, SSAB boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, SSAB grew its EBIT by 163% last year, which is an impressive improvement. 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 it is future earnings, more than anything, that will determine SSAB's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SSAB 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. In the last two years, SSAB's free cash flow amounted to 50% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although SSAB's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr9.26b. And we liked the look of last year's 163% year-on-year EBIT growth. So we don't think SSAB's use of debt is risky. 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. Be aware that SSAB is showing 2 warning signs in our investment analysis , and 1 of those is significant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.