Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Boozt AB (publ) (STO:BOOZT) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Boozt's Debt?
As you can see below, at the end of March 2022, Boozt had kr449.0m of debt, up from kr187.9m a year ago. Click the image for more detail. But on the other hand it also has kr1.12b in cash, leading to a kr669.9m net cash position.
How Strong Is Boozt's Balance Sheet?
We can see from the most recent balance sheet that Boozt had liabilities of kr2.07b falling due within a year, and liabilities of kr749.6m due beyond that. Offsetting these obligations, it had cash of kr1.12b as well as receivables valued at kr179.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr1.52b.
While this might seem like a lot, it is not so bad since Boozt has a market capitalization of kr6.22b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Boozt also has more cash than debt, so we're pretty confident it can manage its debt safely.
In fact Boozt's saving grace is its low debt levels, because its EBIT has tanked 42% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Boozt'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Boozt 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, Boozt reported free cash flow worth 17% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Although Boozt's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr669.9m. So although we see some areas for improvement, we're not too worried about Boozt's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Boozt has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.