Is Wästbygg Gruppen (STO:WBGR B) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Wästbygg Gruppen AB (publ) (STO:WBGR B) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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.

View our latest analysis for Wästbygg Gruppen

How Much Debt Does Wästbygg Gruppen Carry?

The image below, which you can click on for greater detail, shows that Wästbygg Gruppen had debt of kr1.52b at the end of March 2024, a reduction from kr1.77b over a year. On the flip side, it has kr172.0m in cash leading to net debt of about kr1.35b.

A Look At Wästbygg Gruppen's Liabilities

According to the last reported balance sheet, Wästbygg Gruppen had liabilities of kr2.77b due within 12 months, and liabilities of kr314.0m due beyond 12 months. Offsetting these obligations, it had cash of kr172.0m as well as receivables valued at kr1.12b due within 12 months. So it has liabilities totalling kr1.80b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of kr1.51b, we think shareholders really should watch Wästbygg Gruppen's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Wästbygg Gruppen's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Wästbygg Gruppen made a loss at the EBIT level, and saw its revenue drop to kr4.7b, which is a fall of 12%. We would much prefer see growth.

Caveat Emptor

Not only did Wästbygg Gruppen's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable kr384m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of kr218m over the last twelve months. That means it's on the risky side of things. 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. We've identified 1 warning sign with Wästbygg Gruppen , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.