Does KABE Group AB (publ.) (STO:KABE B) use too much debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, KABE Group AB (ed.) (STO:KABE B) is in debt. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for KABE Group AB (publ.)

What is the debt of KABE Group AB (publ.)?

You can click on the graph below for historical figures, but it shows that KABE Group AB (publ.) had a debt of 82.0 million kr in June 2022, compared to 144.0 million kr a year before. But on the other hand, he also has 520.0 million kr in cash, resulting in a net cash position of 438.0 million kr.

OM:KABE B Debt to Equity Historical 23 October 2022

A look at the liabilities of KABE Group AB (publ.)

According to the last published balance sheet, KABE Group AB (publ.) had liabilities of 833.0 million kr due within 12 months and liabilities of 141.0 million kr due beyond 12 months. In return, he had 520.0 million kr in cash and 450.0 million kr in debt due within 12 months. These liquid assets therefore roughly correspond to the total liabilities.

Considering the size of KABE Group AB (publ.), it appears that its cash is well balanced against its total liabilities. So while it’s hard to imagine the 1.70 billion kr company struggling to find cash, we still think it’s worth keeping an eye on its balance sheet. Although it has liabilities of note, KABE Group AB (publ.) also has more cash than debt, so we are quite confident that it can manage its debt safely.

On top of that, we are pleased to report that KABE Group AB (publ.) increased its EBIT by 57%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of KABE Group AB (publ.) that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although KABE Group AB (publ.) has net cash on its balance sheet, it is always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how to how quickly it builds (or erodes) that cash balance. Over the past three years, KABE Group AB (publ.) has actually produced more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summary

While it is always a good idea to look at a company’s total liabilities, it is very reassuring that KABE Group AB (publ.) has 438.0 million kr in net cash. The icing on the cake was to convert 111% of this EBIT into free cash flow, which brought in 139 million kr. So is the debt of KABE Group AB (publ.) a risk? This does not seem to us to be the case. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for KABE Group AB (publ.) you should know.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

Valuation is complex, but we help make it simple.

Find out if KABE Group AB (ed.) is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Myra R.

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