Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies BTS Group AB (publ) (STO:BTS B) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is BTS Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 BTS Group had kr107.8m of debt, an increase on kr81.2, over one year. But on the other hand it also has kr270.5m in cash, leading to a kr162.7m net cash position.
How Strong Is BTS Group's Balance Sheet?
We can see from the most recent balance sheet that BTS Group had liabilities of kr494.2m falling due within a year, and liabilities of kr462.3m due beyond that. Offsetting these obligations, it had cash of kr270.5m as well as receivables valued at kr432.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr253.4m.
Since publicly traded BTS Group shares are worth a total of kr4.54b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, BTS Group boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that BTS Group has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if BTS Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. BTS 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. During the last three years, BTS Group produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to look at a company's total liabilities, it is very reassuring that BTS Group has kr162.7m in net cash. And we liked the look of last year's 36% year-on-year EBIT growth. So we don't think BTS Group's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in BTS Group, you may well want to click here to check an interactive graph of its earnings per share history.
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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