Does Concentric (STO:COIC) Have A Healthy Balance Sheet?
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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Concentric AB (publ) (STO:COIC) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. 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.
Check out our latest analysis for Concentric
What Is Concentric's Net Debt?
As you can see below, at the end of September 2019, Concentric had kr175.0m of debt, up from kr179 a year ago. Click the image for more detail. However, its balance sheet shows it holds kr720.0m in cash, so it actually has kr545.0m net cash.
How Healthy Is Concentric's Balance Sheet?
We can see from the most recent balance sheet that Concentric had liabilities of kr674.0m falling due within a year, and liabilities of kr756.0m due beyond that. On the other hand, it had cash of kr720.0m and kr296.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr414.0m.
Since publicly traded Concentric shares are worth a total of kr6.56b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Concentric boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Concentric has increased its EBIT by 5.8% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Concentric can strengthen its balance sheet over time. 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. Concentric 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, Concentric actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Concentric has kr545.0m in net cash. And it impressed us with free cash flow of kr446m, being 104% of its EBIT. So we don't think Concentric's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Concentric is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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