These 4 Measures Indicate That K2A Knaust & Andersson Fastigheter (STO:K2A B) Is Using Debt Extensively

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. Importantly, K2A Knaust & Andersson Fastigheter AB (publ) (STO:K2A B) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for K2A Knaust & Andersson Fastigheter

What Is K2A Knaust & Andersson Fastigheter's Net Debt?

As you can see below, K2A Knaust & Andersson Fastigheter had kr7.03b of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of kr564.3m, its net debt is less, at about kr6.46b.

A Look At K2A Knaust & Andersson Fastigheter's Liabilities

We can see from the most recent balance sheet that K2A Knaust & Andersson Fastigheter had liabilities of kr3.04b falling due within a year, and liabilities of kr4.94b due beyond that. On the other hand, it had cash of kr564.3m and kr239.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr7.18b.

This deficit casts a shadow over the kr877.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, K2A Knaust & Andersson Fastigheter would likely require a major re-capitalisation if it had to pay its creditors today.

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.

Weak interest cover of 1.1 times and a disturbingly high net debt to EBITDA ratio of 27.2 hit our confidence in K2A Knaust & Andersson Fastigheter like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. The good news is that K2A Knaust & Andersson Fastigheter grew its EBIT a smooth 64% over the last twelve months. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine K2A Knaust & Andersson Fastigheter'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, K2A Knaust & Andersson Fastigheter recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

To be frank both K2A Knaust & Andersson Fastigheter's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. Overall, it seems to us that K2A Knaust & Andersson Fastigheter's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for K2A Knaust & Andersson Fastigheter (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.