David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Concentric AB (publ) (STO:COIC) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Concentric's Net Debt?
As you can see below, Concentric had kr177.0m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But on the other hand it also has kr677.0m in cash, leading to a kr500.0m net cash position.
How Healthy Is Concentric's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Concentric had liabilities of kr533.0m due within 12 months and liabilities of kr781.0m due beyond that. Offsetting this, it had kr677.0m in cash and kr327.0m in receivables that were due within 12 months. So it has liabilities totalling kr310.0m more than its cash and near-term receivables, combined.
Given Concentric has a market capitalization of kr4.61b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Concentric also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also positive, Concentric grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Concentric's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Concentric has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Concentric actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Concentric has kr500m in net cash. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in kr511m. So is Concentric's debt a risk? It doesn't seem so to us. We'd be very excited to see if Concentric insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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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