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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that K2A Knaust & Andersson Fastigheter AB (publ) (STO:K2A B) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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.

Check out 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 kr6.65b of debt at September 2023, down from kr7.28b a year prior. However, it does have kr223.5m in cash offsetting this, leading to net debt of about kr6.43b.

How Healthy Is K2A Knaust & Andersson Fastigheter's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that K2A Knaust & Andersson Fastigheter had liabilities of kr2.87b due within 12 months and liabilities of kr4.80b due beyond that. Offsetting this, it had kr223.5m in cash and kr176.0m in receivables that were due within 12 months. So it has liabilities totalling kr7.27b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the kr657.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, K2A Knaust & Andersson Fastigheter would probably need a major re-capitalization if its creditors were to demand repayment.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Weak interest cover of 0.88 times and a disturbingly high net debt to EBITDA ratio of 25.5 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. Looking on the bright side, K2A Knaust & Andersson Fastigheter boosted its EBIT by a silky 59% in the last year. Like a mother's loving embrace of a newborn that sort of growth builds resilience, putting the company in a stronger position to manage its debt. 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 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 it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, K2A Knaust & Andersson Fastigheter produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

On the face of it, K2A Knaust & Andersson Fastigheter's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at growing its EBIT; that's encouraging. Overall, we think it's fair to say that K2A Knaust & Andersson Fastigheter has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. 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. Case in point: We've spotted 4 warning signs for K2A Knaust & Andersson Fastigheter you should be aware of, and 1 of them doesn't sit too well with us.

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.

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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.