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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. 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 Lifco AB (publ) (STO:LIFCO B) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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. 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.
View our latest analysis for Lifco
What Is Lifco's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Lifco had kr5.09b of debt, an increase on kr4.13b, over one year. However, it also had kr340.0m in cash, and so its net debt is kr4.75b.
How Healthy Is Lifco's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Lifco had liabilities of kr6.96b due within 12 months and liabilities of kr2.24b due beyond that. On the other hand, it had cash of kr340.0m and kr2.24b worth of receivables due within a year. So its liabilities total kr6.61b more than the combination of its cash and short-term receivables.
Since publicly traded Lifco shares are worth a total of kr40.5b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
We'd say that Lifco's moderate net debt to EBITDA ratio ( being 1.8), indicates prudence when it comes to debt. And its strong interest cover of 42.6 times, makes us even more comfortable. Also relevant is that Lifco has grown its EBIT by a very respectable 26% in the last year, thus enhancing its ability to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Lifco can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.