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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Kemira Oyj (HEL:KEMIRA) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Kemira Oyj
What Is Kemira Oyj's Debt?
As you can see below, Kemira Oyj had €877.9m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had €91.6m in cash, and so its net debt is €786.3m.
A Look At Kemira Oyj's Liabilities
Zooming in on the latest balance sheet data, we can see that Kemira Oyj had liabilities of €679.7m due within 12 months and liabilities of €982.3m due beyond that. On the other hand, it had cash of €91.6m and €426.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.14b.
This is a mountain of leverage relative to its market capitalization of €1.87b. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.
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.
Kemira Oyj has net debt worth 2.3 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 6.0 times the interest expense. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. We note that Kemira Oyj grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kemira Oyj's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.