David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies MaxFastigheter i Sverige AB (publ) (STO:MAXF) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for MaxFastigheter i Sverige
What Is MaxFastigheter i Sverige's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 MaxFastigheter i Sverige had debt of kr1.28b, up from kr863.2m in one year. However, because it has a cash reserve of kr70.5m, its net debt is less, at about kr1.21b.
How Strong Is MaxFastigheter i Sverige's Balance Sheet?
We can see from the most recent balance sheet that MaxFastigheter i Sverige had liabilities of kr402.0m falling due within a year, and liabilities of kr1.05b due beyond that. On the other hand, it had cash of kr70.5m and kr48.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr1.33b.
The deficiency here weighs heavily on the kr566.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we definitely think shareholders need to watch this one closely. At the end of the day, MaxFastigheter i Sverige would probably need a major re-capitalization if its creditors were to demand repayment.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.