Does Empir Group (STO:EMPIR B) Have A Healthy Balance Sheet?

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 note that Empir Group AB (STO:EMPIR B) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Empir Group

What Is Empir Group's Net Debt?

As you can see below, Empir Group had kr12.6m of debt at September 2020, down from kr24.1m a year prior. However, its balance sheet shows it holds kr32.1m in cash, so it actually has kr19.5m net cash.

How Healthy Is Empir Group's Balance Sheet?

According to the last reported balance sheet, Empir Group had liabilities of kr78.8m due within 12 months, and liabilities of kr14.6m due beyond 12 months. Offsetting these obligations, it had cash of kr32.1m as well as receivables valued at kr43.6m due within 12 months. So it has liabilities totalling kr17.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Empir Group has a market capitalization of kr66.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Empir Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Empir Group made a loss at the EBIT level, last year, it was also good to see that it generated kr432k in EBIT over the last twelve months. 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 Empir 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Empir Group 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, Empir Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Empir Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr19.5m. And it impressed us with free cash flow of kr15m, being 3,449% of its EBIT. So is Empir 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. To that end, you should be aware of the 1 warning sign we've spotted with Empir Group .

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. 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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