In This Article:
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Jeudan A/S (CPH:JDAN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Jeudan
How Much Debt Does Jeudan Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Jeudan had ø17.2b of debt, an increase on ø15.9b, over one year. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is Jeudan's Balance Sheet?
We can see from the most recent balance sheet that Jeudan had liabilities of ø1.37b falling due within a year, and liabilities of ø17.7b due beyond that. On the other hand, it had cash of ø126.7m and ø209.7m worth of receivables due within a year. So it has liabilities totalling ø18.8b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the ø12.2b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Jeudan 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
With a net debt to EBITDA ratio of 20.0, it's fair to say Jeudan does have a significant amount of debt. But the good news is that it boasts fairly comforting interest cover of 5.4 times, suggesting it can responsibly service its obligations. Importantly Jeudan's EBIT was essentially flat over the last twelve months. Ideally it can diminish its debt load by kick-starting earnings growth. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jeudan's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.