These 4 metrics indicate that Kamux Oyj (HEL: KAMUX) is using debt reasonably well
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, âThe biggest risk in investing is not price volatility, but the fact that you suffer a permanent loss of capital. 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 can see that Kamux Oyj (HEL: KAMUX) uses debt in his business. But does this debt worry shareholders?
When Is Debt a Problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. 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. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Kamux Oyj
What is Kamux Oyj’s debt?
As you can see below, Kamux Oyj had a debt of 23.2 million euros in March 2021, up from 27.9 million euros the previous year. Net debt is about the same because it doesn’t have a lot of cash.
How healthy is Kamux Oyj’s track record?
The latest balance sheet data shows Kamux Oyj had debts of â¬ 61.9 million due within one year, and debts of â¬ 57.9 million due thereafter. On the other hand, it had cash of â¬ 400,000 and â¬ 20.8 million in receivables within one year. Its liabilities thus exceed the sum of its cash and its receivables (short term) by â¬ 98.6 million.
Considering that the listed Kamux Oyj shares are worth a total of 686.5 million euros, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Kamux Oyj’s net debt is only 0.66 times its EBITDA. And its EBIT easily covers its interest costs, being 19.4 times higher. So we’re pretty relaxed about its ultra-conservative use of debt. On top of that, we are happy to report that Kamux Oyj has increased its EBIT by 34%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Kamux Oyj’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to pay off 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, Kamux Oyj’s free cash flow has been 28% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.
Our point of view
The good news is that Kamux Oyj’s demonstrated ability to cover his interest costs with his EBIT delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a little concerned about its conversion from EBIT to free cash flow. Considering all of this data, it seems to us that Kamux Oyj is taking a pretty sane approach to debt. This means that they are taking a bit more risk, in the hope of increasing returns for shareholders. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. To do this, you need to know the 1 warning sign we spotted with Kamux Oyj.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
When trading stocks or any other investment, use the platform considered by many to be the gateway for professionals to the global market, Interactive Brokers. You get the cheapest * trading on stocks, options, futures, forex, bonds and funds from around the world from a single integrated account.
This Simply Wall St article is general in nature. 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 documents. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.