Boliden (STO:BOL) appears to be using its debt quite wisely

David Iben put it best when he said, “Volatility is not a risk we care about. We care about avoiding permanent loss of capital.” When you think about how risky a particular stock is, it is It may be obvious that you need to consider debt, because too much debt can ruin a business. We can see that Boliden AB (publ) (STO:BOL) uses debt in its business. But the real question is whether this debt makes the company risky.

Why does debt pose risks?

Debt helps a business until the business has difficulty paying it off, whether with new capital or free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still costly) situation is where a company must dilute shareholders at a cheap share price just to get debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high returns. When we examine debt levels, we first consider both cash and debt levels together.

Check out our latest analysis for Boliden

How much is Boliden’s debt?

The image below, which you can click on for more details, shows that Boliden had kr16.7 billion in debt as of September 2024, up from kr15.4 billion in a year. On the other hand, the company has cash of kr3.48b leading to net debt of about kr13.2b.

How healthy is Boliden’s balance sheet?

The most recent balance sheet shows that within a year Boliden had liabilities of 22.4 billion crowns and additional liabilities of 27.1 billion crowns. Offsetting these obligations, it had cash of kr3.48b as well as receivables valued at kr8.94b due within 12 months. So it has liabilities totaling kr37.1b more than its cash and short-term receivables combined.

Boliden has a market capitalization of kr89.0b, so it could very likely raise cash to improve its balance sheet if needed. Nevertheless, it is worth taking a close look at your ability to repay your debts.

We use two main ratios to inform us about the level of debt relative to profits. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times earnings before interest and tax (EBIT) cover interest expense (or interest cover, for short). . We take into account both the absolute amount of the debt and the interest paid on it.

Boliden has a low net debt to EBITDA ratio of just 0.73. And its EBIT easily covers its interest expense and is 19.0x. So you could argue that it is no more threatened by its debt than an elephant is threatened by a mouse. Additionally, Boliden grew its EBIT by 30% over the last twelve months, and this growth will make it easier to manage its debt. There is no doubt that the balance sheet is where we learn the most about debt. But above all, future profits will determine whether Boliden can maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

After all, a company needs free cash flow to pay off debt; Book profits are simply not enough. So the logical step is to examine the proportion of that EBIT that corresponds to actual free cash flow. Over the last three years, Boliden generated free cash flow worth 9.6% of its EBIT, an uninspiring performance. This low level of cash conversion undermines its ability to manage and pay off debt.

Our view

The good news is that Boliden’s proven ability to cover its interest expense with its EBIT delights us like a fluffy puppy delights a toddler. But the stark truth is that it’s the conversion of EBIT to free cash flow that concerns us. Taking all of these factors into account, it appears that Boliden can easily manage its current debt levels. On the positive side, this leverage can boost shareholder returns, but the potential downside is a higher risk of loss, which is why it’s worth keeping an eye on the balance sheet. There is no doubt that the balance sheet is where we learn the most about debt. However, not all investment risks lie on the balance sheet – quite the opposite. For this purpose, you should be aware of this 1 warning sign we spotted with Boliden.

Ultimately, it’s often better to focus on companies that are free of net debt. You can access our special list of such companies (all with a track record of growing profits). It’s free.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.