We Think Byggmästare Anders J Ahlström Holding (STO:AJA B) Is Taking Some Risk With Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Byggmästare Anders J Ahlström Holding AB (publ) (STO:AJA B) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Byggmästare Anders J Ahlström Holding

How Much Debt Does Byggmästare Anders J Ahlström Holding Carry?

The image below, which you can click on for greater detail, shows that Byggmästare Anders J Ahlström Holding had debt of kr182.0m at the end of June 2023, a reduction from kr231.3m over a year. However, it does have kr124.6m in cash offsetting this, leading to net debt of about kr57.4m.

How Healthy Is Byggmästare Anders J Ahlström Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Byggmästare Anders J Ahlström Holding had liabilities of kr287.1m due within 12 months and liabilities of kr199.9m due beyond that. On the other hand, it had cash of kr124.6m and kr104.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr257.8m.

Given Byggmästare Anders J Ahlström Holding has a market capitalization of kr1.35b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt sitting at just 0.45 times EBITDA, Byggmästare Anders J Ahlström Holding is arguably pretty conservatively geared. And it boasts interest cover of 9.4 times, which is more than adequate. It is just as well that Byggmästare Anders J Ahlström Holding's load is not too heavy, because its EBIT was down 71% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Byggmästare Anders J Ahlström Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Looking at the most recent three years, Byggmästare Anders J Ahlström Holding recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Byggmästare Anders J Ahlström Holding's EBIT growth rate was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. In particular, its net debt to EBITDA was re-invigorating. Looking at all the angles mentioned above, it does seem to us that Byggmästare Anders J Ahlström Holding is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Byggmästare Anders J Ahlström Holding you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.