Is Axfood (STO:AXFO) using too much debt?
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Axfood AB (publisher) (STO:AXFO) uses debt. But the more important question is: what risk does this debt create?
When is debt dangerous?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
See our latest analysis for Axfood
What is Axfood’s debt?
The image below, which you can click on for more details, shows that in September 2021, Axfood had a debt of 1.88 billion kr, compared to 396.0 million kr in one year. But on the other hand, he also has 2.34 billion kr in cash which leads to a net cash position of 462.0 million kr.
How strong is Axfood’s balance sheet?
We can see from the most recent balance sheet that Axfood had liabilities of 10.0 billion kr due in one year, and liabilities of 5.88 billion kr due beyond. On the other hand, it had a cash position of 2.34 billion kr and 1.08 billion kr of receivables due within one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 12.5 billion kr.
This shortfall is not that bad as Axfood is worth 51.2 billion kr, and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt. Despite its large liabilities, Axfood has a net cash position, so it is fair to say that it is not very indebted!
The good news is that Axfood increased its EBIT by 3.7% year-on-year, which should ease any worries about debt repayment. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Axfood 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, a company can only repay its debts with cash, not book profits. Although Axfood has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it’s building ( or erodes) this cash balance. . Fortunately for all shareholders, Axfood has actually produced more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Although Axfood’s balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has a net cash position of 462.0 million kr. And it impressed us with a free cash flow of kr 3.3 billion, or 117% of its EBIT. We therefore do not believe that Axfood’s use of debt is risky. Of course, we wouldn’t say no to the extra confidence we’d gain if we knew Axfood insiders were buying shares: if you’re on the same page, you can find out if insiders are buying by clicking this link .
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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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.