Is Byggmästare Anders J Ahlström Holding (STO:AJA B) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Byggmästare Anders J Ahlström Holding AB (publ) (STO:AJA B) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Byggmästare Anders J Ahlström Holding

What Is Byggmästare Anders J Ahlström Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Byggmästare Anders J Ahlström Holding had kr207.1m of debt, an increase on kr4.87m, over one year. But it also has kr439.5m in cash to offset that, meaning it has kr232.4m net cash.

A Look At Byggmästare Anders J Ahlström Holding's Liabilities

According to the last reported balance sheet, Byggmästare Anders J Ahlström Holding had liabilities of kr262.3m due within 12 months, and liabilities of kr235.0m due beyond 12 months. Offsetting this, it had kr439.5m in cash and kr122.0m in receivables that were due within 12 months. So it actually has kr64.3m more liquid assets than total liabilities.

This surplus suggests that Byggmästare Anders J Ahlström Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Byggmästare Anders J Ahlström Holding has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Byggmästare Anders J Ahlström Holding can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Byggmästare Anders J Ahlström Holding?

While Byggmästare Anders J Ahlström Holding lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of kr127m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. We've identified 2 warning signs with Byggmästare Anders J Ahlström Holding (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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