David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that Stendörren Fastigheter AB (editor) (STO: STEF B) has a debt on its balance sheet. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both liquidity and debt levels.

See our latest review for Stendörren Fastigheter

What is the debt of Stendörren Fastigheter?

As you can see below, Stendörren Fastigheter had a debt of 5.15 billion kr, as of June 2021, which is roughly the same as the previous year. You can click on the graph for more details. On the other hand, he has 242.0 million kr in cash, resulting in net debt of around 4.91 billion kr.

How strong is Stendörren Fastigheter’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Stendörren Fastigheter had a liability of kr 677.0 million due within 12 months and a liability of kr 5.67 billion due thereafter. In return, he had 242.0 million kr in cash and 68.0 million kr in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 6.04 billion crowns.

This deficit is substantial compared to his market cap of 7.63 billion crowns, so he suggests shareholders keep an eye on Stendörren Fastigheter’s use of debt. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.

We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). 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).

With a net debt to EBITDA ratio of 12.5, it’s fair to say that Stendörren Fastigheter has significant debt. However, its interest coverage of 3.3 is reasonably strong, which is a good sign. However, a buyout factor is that Stendörren Fastigheter has increased its EBIT to 13% over the past 12 months, increasing its ability to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately the future profitability of the company will decide whether Stendörren Fastigheter can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Stendörren Fastigheter’s free cash flow has amounted to 34% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.

Our point of view

We would go so far as to say that Stendörren Fastigheter’s net debt on EBITDA was disappointing. But on the positive side, its EBIT growth rate is a good sign and makes us more optimistic. Looking at the balance sheet and taking all of these factors into account, we think debt makes Stendörren Fastigheter stock a bit risky. Some people like this kind of risk, but we are aware of the potential pitfalls, so we would probably prefer him to carry less debt. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. To this end, you should inquire about the 3 warning signs we spotted some with Stendörren Fastigheter (including 2 that should not be overlooked).

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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 shares 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 material. Simply Wall St has no position in the mentioned stocks.

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