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.' 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. As with many other companies CAG Group AB (publ) (STO:CAG) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for CAG Group
What Is CAG Group's Debt?
As you can see below, at the end of March 2021, CAG Group had kr47.8m of debt, up from kr15.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr117.5m in cash, so it actually has kr69.8m net cash.
How Strong Is CAG Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that CAG Group had liabilities of kr149.0m due within 12 months and liabilities of kr80.0m due beyond that. Offsetting this, it had kr117.5m in cash and kr110.9m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.
Having regard to CAG Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr527.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, CAG Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
Fortunately, CAG Group grew its EBIT by 9.2% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CAG Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CAG Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, CAG Group 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
We could understand if investors are concerned about CAG Group's liabilities, but we can be reassured by the fact it has has net cash of kr69.8m. And it impressed us with free cash flow of kr58m, being 127% of its EBIT. So is CAG Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that CAG Group is showing 3 warning signs in our investment analysis , you should know about...
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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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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About OM:CAG
Undervalued with excellent balance sheet.
