Bilia (STO:BILI A) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Bilia AB (publ) (STO:BILI A) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Bilia

How Much Debt Does Bilia Carry?

You can click the graphic below for the historical numbers, but it shows that Bilia had kr2.02b of debt in September 2020, down from kr2.58b, one year before. However, its balance sheet shows it holds kr2.20b in cash, so it actually has kr186.0m net cash.

A Look At Bilia's Liabilities

Zooming in on the latest balance sheet data, we can see that Bilia had liabilities of kr6.24b due within 12 months and liabilities of kr5.44b due beyond that. Offsetting this, it had kr2.20b in cash and kr1.33b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr8.15b.

This deficit is considerable relative to its market capitalization of kr10.3b, so it does suggest shareholders should keep an eye on Bilia's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Bilia boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Bilia grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Bilia's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Bilia may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Bilia reported free cash flow worth 18% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

Although Bilia's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr186.0m. And it impressed us with its EBIT growth of 25% over the last year. So we are not troubled with Bilia's debt use. 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. For example, we've discovered 2 warning signs for Bilia that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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