These 4 Measures Indicate That SSAB (STO:SSAB A) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that SSAB AB (publ) (STO:SSAB A) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its 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 kr6.46b of debt in September 2024, down from kr7.87b, one year before. But it also has kr23.2b in cash to offset that, meaning it has kr16.7b net cash.

A Look At SSAB's Liabilities

According to the last reported balance sheet, SSAB had liabilities of kr24.6b due within 12 months, and liabilities of kr12.3b due beyond 12 months. On the other hand, it had cash of kr23.2b and kr14.9b worth of receivables due within a year. So it actually has kr1.19b more liquid assets than total liabilities.

This surplus suggests that SSAB has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that SSAB has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, SSAB turned things around in the last 12 months, delivering and EBIT of kr9.8b. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the most recent year, SSAB recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case SSAB has kr16.7b in net cash and a decent-looking balance sheet. So we are not troubled with SSAB's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for SSAB (of which 1 is a bit concerning!) you should know about.

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.