David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. 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?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
What Is Byggmästare Anders J Ahlström Holding's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2021 Byggmästare Anders J Ahlström Holding had kr88.0m of debt, an increase on kr4.89m, over one year. But on the other hand it also has kr371.2m in cash, leading to a kr283.2m net cash position.
How Strong 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 kr381.2m due within 12 months and liabilities of kr104.7m due beyond that. On the other hand, it had cash of kr371.2m and kr84.8m worth of receivables due within a year. So it has liabilities totalling kr29.8m more than its cash and near-term receivables, combined.
This state of affairs indicates that Byggmästare Anders J Ahlström Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the kr1.88b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Byggmästare Anders J Ahlström Holding boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, Byggmästare Anders J Ahlström Holding made a loss at the EBIT level, last year, but improved that to positive EBIT of kr36m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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. While Byggmästare Anders J Ahlström Holding 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. Over the last year, Byggmästare Anders J Ahlström Holding actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
We could understand if investors are concerned about Byggmästare Anders J Ahlström Holding's liabilities, but we can be reassured by the fact it has has net cash of kr283.2m. The cherry on top was that in converted 333% of that EBIT to free cash flow, bringing in kr121m. So we don't have any problem with Byggmästare Anders J Ahlström Holding's use of debt. 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 3 warning signs for Byggmästare Anders J Ahlström Holding you should be aware of, and 1 of them is a bit concerning.
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.