Does Betsson (STO:BETS B) Have A Healthy Balance Sheet?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Betsson AB (STO:BETS B) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Betsson
What Is Betsson’s Net Debt?
As you can see below, Betsson had kr1.06b of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have kr1.12b in cash offsetting this, leading to net cash of kr52.0m.
How Healthy Is Betsson’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Betsson had liabilities of kr2.10b due within 12 months and liabilities of kr1.16b due beyond that. Offsetting this, it had kr1.12b in cash and kr1.76b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr380.9m.
Of course, Betsson has a market capitalization of kr10.1b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Betsson also has more cash than debt, so we’re pretty confident it can manage its debt safely.
On top of that, Betsson grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Betsson’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Betsson may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Betsson recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we’d usually expect. That puts it in a very strong position to pay down debt.
While it is always sensible to look at a company’s total liabilities, it is very reassuring that Betsson has kr52.0m in net cash. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in kr1.0b. So we don’t think Betsson’s use of debt is risky. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we’ve spotted 1 warning sign for Betsson you should know about.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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