Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We notice that Indutrade AB (publisher) (STO: INDT) has debt on its balance sheet. But the most important question is: what risk does this debt create?
When is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
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What is Indutrade’s debt?
The graph below, which you can click for more details, shows Indutrade owed kr 5.47 billion in debt as of September 2021; about the same as the year before. On the other hand, he has 930.0 million crowns in cash, resulting in a net debt of around 4.54 billion crowns.
A look at Indutrade’s responsibilities
According to the latest published balance sheet, Indutrade had liabilities of KKr 4.82 billion due within 12 months and KKr 5.45 billion liabilities due beyond 12 months. In compensation for these obligations, it had cash of SEK 930.0 million as well as claims valued at SEK 4.30 billion maturing within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 5.05 billion crowns.
Of course, Indutrade has a titanic market cap of 94.1b kr, so these liabilities are probably manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s indebtedness relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Indutrade’s net debt is only 1.3 times its EBITDA. And its EBIT easily covers its interest costs, being 40.2 times higher. So we’re pretty relaxed about its ultra-conservative use of debt. On top of that, we are happy to report that Indutrade has increased its EBIT by 43%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious place to start. But it is future profits, more than anything, that will determine Indutrade’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Indutrade has generated free cash flow of 91% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.
Our point of view
Indutrade’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! Considering this range of factors, it seems to us that Indutrade is quite cautious with its debt, and the risks appear to be well under control. The balance sheet therefore seems rather healthy to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Indutrade you should know.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.