Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but the fact that you suffer a permanent loss of capital. “. 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. Above all, TradeDoubler AB (released) (STO: TRAD) is in debt. But the real question is whether this debt makes the business risky.
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 costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and finance debt levels.
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How many debts does TradeDoubler carry?
As you can see below, TradeDoubler had a debt of 113.7 million kr in June 2021, up from 128.9 million kr a year earlier. On the other hand, he has 55.1 million kr in cash, resulting in net debt of around 58.6 million kr.
A look at the responsibilities of TradeDoubler
The latest balance sheet data shows TradeDoubler had liabilities of KKr 414.4 million due within one year, and KKR 134.1 million liabilities due after that. On the other hand, he had cash of kr 55.1 million and kr 304.3 million of receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by KKr 189.1 million.
This shortfall is sizable compared to its market cap of SEK 277.1 million, so he suggests shareholders keep an eye on TradeDoubler’s use of debt. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
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). 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).
TradeDoubler’s debt is 2.5 times its EBITDA, and its EBIT covers its interest charges 4.5 times more. This suggests that while debt levels are significant, we would stop calling them problematic. It should be noted that TradeDoubler’s EBIT has soared like bamboo after the rain, gaining 80% in the past twelve months. This will make it easier to manage your debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But you can’t look at debt in isolation; since TradeDoubler will need income to pay off this debt. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, TradeDoubler has recorded free cash flow of 42% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Our point of view
When it comes to the balance sheet, the bright spot for TradeDoubler was the fact that it appears capable of growing its EBIT with confidence. But the other factors we noted above weren’t so encouraging. For example, it seems like he’s having a bit of trouble managing his total liabilities. Looking at all of this data, we feel a little cautious about TradeDoubler’s debt levels. While debt has its advantage in terms of potential higher returns, we believe shareholders should definitely consider how leverage levels might make the stock riskier. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 4 warning signs with TradeDoubler, and understanding them should be part of your investment process.
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.
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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 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 the mentioned stocks.
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