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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Brinova Fastigheter AB (publ) (STO:BRIN B) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Brinova Fastigheter
How Much Debt Does Brinova Fastigheter Carry?
The image below, which you can click on for greater detail, shows that at June 2019 Brinova Fastigheter had debt of kr2.57b, up from kr2.09b in one year. On the flip side, it has kr56.9m in cash leading to net debt of about kr2.52b.
How Healthy Is Brinova Fastigheter's Balance Sheet?
The latest balance sheet data shows that Brinova Fastigheter had liabilities of kr753.9m due within a year, and liabilities of kr2.04b falling due after that. Offsetting this, it had kr56.9m in cash and kr34.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr2.71b.
This deficit casts a shadow over the kr1.72b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, Brinova Fastigheter would probably need a major re-capitalization if its creditors were to demand repayment.
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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).