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

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.' 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. Importantly, DevPort AB (publ) (STO:DEVP B) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for DevPort

How Much Debt Does DevPort Carry?

You can click the graphic below for the historical numbers, but it shows that DevPort had kr17.2m of debt in December 2021, down from kr37.9m, one year before. However, it does have kr17.3m in cash offsetting this, leading to net cash of kr139.0k.

A Look At DevPort's Liabilities

Zooming in on the latest balance sheet data, we can see that DevPort had liabilities of kr120.9m due within 12 months and liabilities of kr15.8m due beyond that. Offsetting this, it had kr17.3m in cash and kr137.3m in receivables that were due within 12 months. So it can boast kr17.9m more liquid assets than total liabilities.

This surplus suggests that DevPort has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, DevPort boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, DevPort grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is DevPort's earnings that will influence how the balance sheet holds up in the future. 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 95% 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 it is always sensible to investigate a company's debt, in this case DevPort has kr139.0k in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -kr7.0m, being 95% of its EBIT. So we don't think DevPort's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with DevPort (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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. 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.