Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, Boozt AB (publ) (STO:BOOZT) is in debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Boozt
What is Boozt’s debt?
As you can see below, at the end of March 2022, Boozt had a debt of 449.0 million kr, compared to 187.9 million kr a year ago. Click on the image for more details. But on the other hand, he also has 1.12 billion kr in cash which translates to a net cash position of 669.9 million kr.
How strong is Boozt’s balance sheet?
We can see from the most recent balance sheet that Boozt had liabilities of 2.07 billion kr due in one year, and liabilities of 749.6 million kr due beyond. As compensation for these obligations, it had cash of 1.12 billion kr as well as receivables valued at 179.1 million kr and payable within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of kr 1.52 billion.
While that might sound like a lot, it’s not that bad since Boozt has a market capitalization of 6.22 billion kr, so he could probably strengthen his balance sheet by raising capital if needed. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. While he has liabilities worth noting, Boozt also has more cash than debt, so we’re pretty confident he can manage his debt safely.
In fact, Boozt’s saving grace is its low level of leverage, as its EBIT has fallen 42% over the past twelve months. When it comes to paying off debt, lower income is no more helpful than sugary sodas for your health. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Boozt’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, while the taxman may love accounting profits, lenders only accept cash. Boozt may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Boozt has reported free cash flow of 17% of its EBIT, which is really quite low. For us, such a low cash conversion creates a bit of paranoia about the ability to extinguish the debt.
Although Boozt’s balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that he has a net cash position of 669.9 million kr. So, while we see areas for improvement, we’re not too worried about Boozt’s record. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, Boozt has 4 warning signs (and 1 which is a little obnoxious) that we think you should know about.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.