We Think SSAB (STO:SSAB A) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, SSAB AB (publ) (STO:SSAB A) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, 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.

See our latest analysis for SSAB

How Much Debt Does SSAB Carry?

As you can see below, SSAB had kr9.92b of debt at December 2021, down from kr15.0b a year prior. However, its balance sheet shows it holds kr13.8b in cash, so it actually has kr3.87b 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 kr25.8b due within 12 months and liabilities of kr12.7b due beyond that. On the other hand, it had cash of kr13.8b and kr11.8b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr12.9b.

While this might seem like a lot, it is not so bad since SSAB has a market capitalization of kr62.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, SSAB also has more cash than debt, so we're pretty confident 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 kr18b. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. During the last year, SSAB produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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 kr3.87b. So we are not troubled with SSAB's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for SSAB (1 can't be ignored) you should be aware of.

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.