We believe that NCC (STO: NCC B) can stay on top of its debt

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. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Mostly, CCN AB (published) (STO: NCC B) carries a debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest analysis for NCC

What is CNC’s net debt?

As you can see below, NCC had debt of Kroner 1.92 billion in March 2021, up from Kroner 2.50 billion a year earlier. But he also has 3.05 billion kr in cash to compensate for this, which means he has net cash of 1.12 billion kr.

OM: NCC B History of debt to equity July 17, 2021

Is CNC’s balance sheet healthy?

Zooming in on the latest balance sheet data, we can see that NCC had a liability of NKr 15.5 billion due within 12 months and liabilities of NKr 9.23 billion beyond. In compensation for these obligations, it had cash of 3.05 billion crowns as well as claims valued at 8.92 billion crowns within 12 months. Its liabilities therefore total 12.8 billion crowns more than the combination of its cash and short-term receivables.

This is a mountain of leverage compared to its market capitalization of SEK 16.2 billion. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly. While she has some noteworthy liabilities, NCC also has more cash than debt, so we’re pretty confident that she can handle her debt safely.

On the other hand, NCC’s EBIT has plunged 18% over the past year. If this rate of decline in profits continues, the company could find itself in a difficult situation. 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 NCC 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.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. While NCC has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building (or erodes) that cash balance. . Over the past two years, NCC has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.

In summary

While NCC’s balance sheet is not particularly strong, due to the total liabilities it is clearly positive to see that it has net cash of Kroner 1.12 billion. The icing on the cake was that he converted 105% of that EBIT into free cash flow, bringing in 523 million crowns. So we have no problem with the use of debt by NCC. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 3 warning signs for the NCC (1 is a bit rude) you should know about it.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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This Simply Wall St article is general in nature. 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 any of the stocks mentioned.
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