These 4 Measures Indicate That B3 Consulting Group (STO:B3) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that B3 Consulting Group AB (publ) (STO:B3) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for B3 Consulting Group

What Is B3 Consulting Group's Debt?

The image below, which you can click on for greater detail, shows that B3 Consulting Group had debt of kr88.4m at the end of March 2021, a reduction from kr100.1m over a year. However, it does have kr46.9m in cash offsetting this, leading to net debt of about kr41.5m.

A Look At B3 Consulting Group's Liabilities

The latest balance sheet data shows that B3 Consulting Group had liabilities of kr319.6m due within a year, and liabilities of kr18.3m falling due after that. Offsetting this, it had kr46.9m in cash and kr155.5m in receivables that were due within 12 months. So its liabilities total kr135.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since B3 Consulting Group has a market capitalization of kr489.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt sitting at just 0.92 times EBITDA, B3 Consulting Group is arguably pretty conservatively geared. And it boasts interest cover of 7.5 times, which is more than adequate. But the other side of the story is that B3 Consulting Group saw its EBIT decline by 2.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 B3 Consulting Group'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, B3 Consulting Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Happily, B3 Consulting Group's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. But truth be told we feel its EBIT growth rate does undermine this impression a bit. All these things considered, it appears that B3 Consulting Group can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 4 warning signs we've spotted with B3 Consulting Group .

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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