In This Article:
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 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 Fiskars Oyj Abp (HEL:FSKRS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Fiskars Oyj Abp
What Is Fiskars Oyj Abp's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Fiskars Oyj Abp had €185.3m of debt in June 2019, down from €217.7m, one year before. However, because it has a cash reserve of €11.0m, its net debt is less, at about €174.3m.
How Healthy Is Fiskars Oyj Abp's Balance Sheet?
The latest balance sheet data shows that Fiskars Oyj Abp had liabilities of €311.7m due within a year, and liabilities of €289.4m falling due after that. Offsetting this, it had €11.0m in cash and €237.8m in receivables that were due within 12 months. So its liabilities total €352.3m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Fiskars Oyj Abp is worth €1.02b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
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).