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, Aker Solutions ASA (OB: AKSO) bears the debt. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first consider both liquidity and debt levels.
What is the debt of Aker Solutions?
You can click on the graph below for the historical figures, but it shows that Aker Solutions had a debt of 2.66 billion kr in March 2021, up from 4.87 billion kr a year earlier. However, his balance sheet shows that he holds 3.46 billion kr in cash, so he actually has a net cash position of 794.0 million kr.
How strong is Aker Solutions’ balance sheet?
The latest balance sheet data shows that Aker Solutions had KKr 10.7 billion in debt due within one year and KKr 8.31 billion in debt due thereafter. On the other hand, he had a treasury of 3.46 billion crowns and 7.76 billion crowns of receivables within a year. It therefore has liabilities totaling SEK 7.75 billion more than its cash and short-term receivables combined.
When you consider that this shortfall exceeds the company’s market cap kr7.01b, you may well be inclined to take a close look at the balance sheet. Hypothetically, an extremely large dilution would be required if the company was forced to repay its debts by raising capital at the current share price. Since Aker Solutions has more cash than debt, we’re pretty confident that it can handle its debt, despite having a lot of liabilities in total. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Aker Solutions’ ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Over 12 months, Aker Solutions recorded a loss in EBIT level and saw its turnover fall to 26 billion kr, a decrease of 7.8%. We would much prefer to see the growth.
So how risky are Aker solutions?
While Aker Solutions lost money on earnings before interest and taxes (EBIT), it actually generated positive free cash flow of € 1.2 billion. Thus, although it is in deficit, it does not appear to present too much short-term balance sheet risk, given the net cash position. We are not impressed with its top line growth, so until we see positive and sustainable EBIT we consider the stock to be high risk. 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 off the balance sheet. We have identified 1 warning sign with Aker Solutions , and understanding them should be part of your investment process.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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