We Think DevPort (STO:DEVP B) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that DevPort AB (publ) (STO:DEVP B) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for DevPort

What Is DevPort's Net Debt?

The image below, which you can click on for greater detail, shows that DevPort had debt of kr16.7m at the end of June 2021, a reduction from kr44.0m over a year. But it also has kr27.6m in cash to offset that, meaning it has kr10.9m net cash.

How Strong Is DevPort's Balance Sheet?

We can see from the most recent balance sheet that DevPort had liabilities of kr103.0m falling due within a year, and liabilities of kr16.6m due beyond that. Offsetting this, it had kr27.6m in cash and kr104.1m in receivables that were due within 12 months. So it can boast kr12.2m more liquid assets than total liabilities.

This short term liquidity is a sign that DevPort could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, DevPort boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that DevPort grew its EBIT by 355% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since DevPort will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. DevPort 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, DevPort recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that DevPort has net cash of kr10.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of kr8.6m, being 92% of its EBIT. So we don't think DevPort's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that DevPort is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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