Does Job Solution Sweden Holding (STO:JOBS) have a healthy balance sheet?

Warren Buffett famously said, “Volatility is far from synonymous with risk.” It is natural to consider a company’s balance sheet when examining its risk, as debt is often involved when a company collapses. Importantly, Employment solution Sweden Holding AB (public) (STO:JOBS) does have debt, but is this a concern for shareholders?

When is debt a problem?

Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of “creative destruction,” where failing companies are mercilessly liquidated by their bankers. However, a more common (but equally painful) scenario is that it has to raise new equity capital at a low price, thereby permanently diluting shareholders. 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 rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Job Solution Sweden Holding

What is Job Solution Sweden Holding’s net debt?

The image below, which you can click on for more details, shows that as of March 2024, Job Solution Sweden Holding had debt of 35.6 million kroner, up from 7.96 million kroner a year ago. However, as it has a cash reserve of 31.5 million kroner, its net debt is lower, at around 4.10 million kroner.

How strong is Job Solution Sweden Holding’s balance sheet?

Looking at the latest balance sheet data, we can see that Job Solution Sweden Holding had liabilities of SEK 111.3 million due within 12 months and liabilities of SEK 49.0 million due beyond that. Offsetting this, it had SEK 31.5 million in cash and SEK 63.2 million in receivables due within 12 months. Its liabilities therefore total SEK 65.7 million more than the combination of its cash and short-term receivables.

This is a huge leverage relative to its market capitalisation of 97.7 million kroner, suggesting shareholders would be heavily diluted if the company needed to urgently strengthen its balance sheet.

We use two main ratios to tell us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) cover its interest expense (or its interest cover, for short). In this way, we consider both the absolute amount of debt and the interest rates paid on it.

Looking at its net debt/EBITDA of 0.52 and interest coverage of 4.2 times, it seems to us that Job Solution Sweden Holding is probably using debt in a pretty reasonable way. But the interest payments are certainly enough to make us wonder how affordable its debt is. Importantly, Job Solution Sweden Holding’s EBIT fell by a staggering 24% over the last twelve months. If that decline continues, paying down debt will be harder than selling foie gras at a vegan convention. When looking at debt levels, the balance sheet is the obvious place to start. But it’s Job Solution Sweden Holding’s revenues that will influence how the balance sheet holds up in the future. So if you’re interested in finding out more about its revenues, it might be worth taking a look at this graph of its long-term revenue trend.

Finally, while the taxman may love accounting profits, lenders only accept cash. So it’s worth checking how much of that EBIT is backed by free cash flow. Over the past two years, Job Solution Sweden Holding created free cash flow equal to 14% of its EBIT, an uninspiring result. Such a weak level of cash conversion undermines its ability to manage and service debt.

Our view

We would venture to say that Job Solution Sweden Holding’s EBIT growth rate was disappointing. But on the positive side, its net debt to EBITDA ratio is a good sign and makes us more optimistic. Overall, we think it is fair to say that Job Solution Sweden Holding has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the other hand, the risk of permanent capital loss is elevated by debt. The balance sheet is clearly the area to focus on when analysing debt. But ultimately, every company can contain the risks that exist outside the balance sheet. For example, we have identified 5 warning signs for Job Solution Sweden Holding (1 is a bit unpleasant) you should take that into account.

If you are interested in investing in companies that can generate profits without the burden of debt, check this out free List of growing companies that have net cash on the balance sheet.

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This Simply Wall St article is general in nature. We provide commentary based solely on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to be 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 aim is to provide you with a long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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