Is SSAB (STO:SSAB A) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies SSAB AB (publ) (STO:SSAB A) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See 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 kr8.22b of debt in March 2023, down from kr9.85b, one year before. However, its balance sheet shows it holds kr27.0b in cash, so it actually has kr18.8b net cash.

How Healthy Is SSAB's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SSAB had liabilities of kr29.7b due within 12 months and liabilities of kr12.6b due beyond that. On the other hand, it had cash of kr27.0b and kr16.1b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that SSAB'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 kr68.7b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that SSAB has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SSAB can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, SSAB reported revenue of kr129b, which is a gain of 20%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is SSAB?

Although SSAB had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of kr13b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. We've identified 2 warning signs with SSAB (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.