David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that By Aarsleff Holding A / S (CPH: PAAL B) has a debt on its balance sheet. But does this debt worry shareholders?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Per Aarsleff Holding
What is the net debt of Per Aarsleff Holding?
As you can see below, at the end of June 2021, Per Aarsleff Holding had 510.5 million crowns in debt, up from 431.2 million crowns a year ago. Click on the image for more details. However, his balance sheet shows that he has 1.23 billion kr in cash, so he actually has a net cash position of 724.3 million kr.
A look at the liabilities of Per Aarsleff Holding
We can see from the most recent balance sheet that Per Aarsleff Holding had debt of Kroner 4.87 billion due within one year, and KKr 781.8 million debt due beyond. In return, he had 1.23 billion crowns in cash and 4.48 billion crowns in receivables due within 12 months. These liquid assets therefore correspond roughly to the total liabilities.
This fact indicates that Per Aarsleff Holding’s balance sheet looks quite strong, as its total liabilities roughly equal its cash. So the kr.5.52b company is very unlikely to run out of cash, but it’s always worth keeping an eye on the balance sheet. Put simply, the fact that Per Aarsleff Holding has more cash than debt is arguably a good indication that it can safely manage its debt.
While Per Aarsleff Holding doesn’t appear to have gained much on the EBIT line, at least earnings remain stable for now. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Per Aarsleff Holding can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Although Per Aarsleff Holding has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) that cash balance. Over the past three years, Per Aarsleff Holding has generated free cash flow of 88% of its very robust EBIT, more than we expected. This positions it well to repay debt if it is desirable.
In summary
While it is always a good idea to investigate a company’s debt, in this case Per Aarsleff Holding has a net cash of kr 724.3million and a decent looking balance sheet. And he impressed us with free cash flow of -Krn 443 million, or 88% of his EBIT. So is Per Aarsleff Holding’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 1 warning sign for Per Aarsleff Holding you must be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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