Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We notice that Thursday A / S (CPH: JDAN) has debt on its balance sheet. But does this debt worry shareholders?
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. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Jeudan
What is Jeudan’s debt?
As you can see below, Jeudan was in debt of 17.9 billion kr, as of March 2021, which is roughly the same as the year before. You can click on the graph for more details. Net debt is about the same because it doesn’t have a lot of cash.
Is Jeudan’s record healthy?
According to the last published balance sheet, Jeudan had a liability of 1.25 billion crowns at less than 12 months and a liability of 19.1 billion crowns at more than 12 months. In compensation for these obligations, it had cash of Kronor 41.7 million as well as receivables valued at Kroner 239.6 million within 12 months. It therefore has liabilities totaling SEK 20.1 billion more than its cash flow and short-term receivables combined.
Since this deficit is actually greater than the company’s market cap of Kroner 14.4 billion, we think shareholders should really watch Jeudan’s debt levels, like a parent watching their child go crazy. cycling for the first time. In the event that the company were to clean up its balance sheet quickly, it seems likely that shareholders would suffer significant dilution.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest 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).
Jeudan’s net debt to EBITDA ratio is 20.9, which suggests rather high debt levels, but its 8.0 times interest coverage suggests debt servicing is easy. Our best guess is that the company does have significant debt. It is important to note that Jeudan’s EBIT has been essentially stable over the past twelve months. We would rather see some growth in earnings as it always helps reduce debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the results of Jeudan that will influence the performance of the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business can only repay its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Jeudan has recorded free cash flow representing a total of 84% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.
Our point of view
The net debt to EBITDA and the level of Jeudan’s total liabilities certainly weighs on this, in our opinion. But its conversion from EBIT to free cash flow tells a very different story and suggests some resilience. When we consider all the factors mentioned, it seems to us that Jeudan is taking risks with its recourse to debt. While this debt may increase returns, we believe the company now has sufficient leverage. The balance sheet is clearly the area you need to focus on when analyzing debt. 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 2 warning signs for Jeudan (1 of which is potentially serious!) that you should be aware of.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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