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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but the fact that you suffer a permanent loss of capital. “. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Pandox AB (released) (STO: PNDX B) uses debt in his business. But does this debt worry shareholders?
When is debt a problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels together.
See our latest analysis for Pandox
How much debt does Pandox have?
The graph below, which you can click for more details, shows that Pandox had a debt of 33.3 billion kr as of June 2021; about the same as the year before. On the other hand, he has 2.71 billion kr in cash, resulting in net debt of around 30.5 billion kr.
Is Pandox’s track record healthy?
The latest balance sheet data shows that Pandox had liabilities of Kroner 7.02 billion due within one year, and KKr 34.7 billion liabilities due after that. In return, he had 2.71 billion kr in cash and 764.0 million kr in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 38.2 billion crowns.
The deficiency here weighs heavily on the kr25.3b company itself, as if a child struggles under the weight of a huge backpack full of books, his sports equipment, and a trumpet. We would therefore be watching its record closely, without a doubt. Ultimately, Pandox would likely need a major recapitalization if its creditors demanded repayment.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
With a net debt to EBITDA ratio of 19.3, it’s fair to say that Pandox has significant debt. But the good news is that he enjoys quite a comforting 3.4x interest coverage, which suggests he can meet his obligations responsibly. Worse yet, Pandox’s EBIT was down 42% from last year. If profits continue to follow this path, it will be more difficult to pay off this debt than to convince us to run a marathon in the rain. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Pandox’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. In the past three years, Pandox has recorded free cash flow of 46% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.
Our point of view
To be frank, Pandox’s net debt to EBITDA and its history of (not) growing its EBIT makes us rather uncomfortable with its debt levels. But at least his conversion from EBIT to free cash isn’t that bad. After reviewing the data points discussed, we believe that Pandox has too much debt. This kind of risk is acceptable to some, but it certainly does not float our boat. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 1 warning sign with Pandox and understanding them should be part of your investment process.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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