These 4 Measures Indicate That Rusta (STO:RUSTA) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Rusta AB (publ) (STO:RUSTA) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, 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.

View our latest analysis for Rusta

What Is Rusta's Debt?

The image below, which you can click on for greater detail, shows that Rusta had debt of kr39.0m at the end of January 2024, a reduction from kr437.3m over a year. However, its balance sheet shows it holds kr420.0m in cash, so it actually has kr381.0m net cash.

How Strong Is Rusta's Balance Sheet?

The latest balance sheet data shows that Rusta had liabilities of kr2.37b due within a year, and liabilities of kr5.00b falling due after that. Offsetting this, it had kr420.0m in cash and kr56.0m in receivables that were due within 12 months. So its liabilities total kr6.89b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Rusta is worth kr11.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Rusta also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Rusta grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Rusta'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. Rusta 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. Happily for any shareholders, Rusta actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Rusta does have more liabilities than liquid assets, it also has net cash of kr381.0m. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in kr1.5b. So we don't have any problem with Rusta's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Rusta, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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.