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. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Feelgood Svenska AB (publ) (STO:FEEL) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Feelgood Svenska
What Is Feelgood Svenska's Debt?
As you can see below, at the end of June 2019, Feelgood Svenska had kr39.1m of debt, up from kr15.8m a year ago. Click the image for more detail. However, it also had kr12.9m in cash, and so its net debt is kr26.2m.
How Strong Is Feelgood Svenska's Balance Sheet?
We can see from the most recent balance sheet that Feelgood Svenska had liabilities of kr196.9m falling due within a year, and liabilities of kr101.8m due beyond that. On the other hand, it had cash of kr12.9m and kr154.6m worth of receivables due within a year. So it has liabilities totalling kr131.1m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Feelgood Svenska is worth kr296.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.