Does Premium Snacks Nordic (STO:SNX) have a healthy balance sheet?
Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Premium Snacks Nordic AB (public) (STO:SNX) uses debt in its operations. But should shareholders worry about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own 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 common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.
See our latest review for Premium Snacks Nordic
What is Premium Snacks Nordic’s debt?
As you can see below, Premium Snacks Nordic had a debt of 36.2 million kr in March 2022, compared to 52.4 million kr the previous year. However, as he has a cash reserve of 2.31 million kr, his net debt is lower at around 33.8 million kr.
How healthy is Premium Snacks Nordic’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Premium Snacks Nordic had liabilities of 63.4 million kr due within 12 months and liabilities of 18.6 million kr due beyond. On the other hand, it had liquid assets of 2.31 million kr and 30.0 million kr of receivables due within the year. It therefore has liabilities totaling kr 49.8 million more than its cash and short-term receivables, combined.
While that might sound like a lot, it’s not that bad since Premium Snacks Nordic has a market capitalization of 99.9 million kr, so it could probably strengthen its balance sheet by raising capital if needed. But we definitely want to keep our eyes peeled for indications that its debt is too risky.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
While we are not concerned about Premium Snacks Nordic’s net debt to EBITDA ratio of 2.6, we believe its extremely low interest coverage of 0.92x is a sign of high leverage. This is largely due to the company’s large amortization charges, which no doubt means that its EBITDA is a very generous measure of earnings, and that its debt may be heavier than it first appears. on board. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. Worse still, Premium Snacks Nordic’s EBIT fell by 75% compared to last year. If profits continue like this in the long term, there is an unimaginable chance of repaying this debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Premium Snacks Nordic 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, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Premium Snacks Nordic has spent a lot of money. While investors no doubt expect a reversal of this situation in due course, this clearly means that its use of debt is more risky.
Our point of view
To be frank, Premium Snacks Nordic’s EBIT to free cash flow conversion and its history of (non-)growth in its EBIT makes us rather uncomfortable with its level of leverage. That said, his ability to manage his total liabilities isn’t all that worrying. Overall, it seems to us that the balance sheet of Premium Snacks Nordic is really a risk for the company. We are therefore almost as suspicious of this stock as a hungry kitten of falling into its owner’s fish pond: once bitten, twice shy, as they say. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 3 warning signs for Premium Snacks Nordic (2 cannot be ignored) which you should be aware of.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.
Calculation of discounted cash flows for each share
Simply Wall St performs a detailed calculation of discounted cash flow every 6 hours for every stock in the market, so if you want to find the intrinsic value of any company, just search here. It’s free.