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. We note that Boliga Gruppen A/S (CPH:BOLIGA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Boliga Gruppen
How Much Debt Does Boliga Gruppen Carry?
As you can see below, at the end of June 2019, Boliga Gruppen had ø38.0m of debt, up from ø34.4m a year ago. Click the image for more detail. However, it does have ø1.47m in cash offsetting this, leading to net debt of about ø36.6m.
How Strong Is Boliga Gruppen's Balance Sheet?
We can see from the most recent balance sheet that Boliga Gruppen had liabilities of ø46.4m falling due within a year, and liabilities of ø2.50m due beyond that. On the other hand, it had cash of ø1.47m and ø50.0m worth of receivables due within a year. So it actually has ø2.65m more liquid assets than total liabilities.
This surplus suggests that Boliga Gruppen has a conservative balance sheet, and could probably eliminate its debt without much difficulty.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
As it happens Boliga Gruppen has a fairly concerning net debt to EBITDA ratio of 5.7 but very strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! Importantly, Boliga Gruppen's EBIT fell a jaw-dropping 38% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Boliga Gruppen's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.