SunDell Estate Nyilvánosan Muködo Részvénytársaság (BUSE:SUNDELL) Has A Somewhat Strained Balance Sheet

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.' 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 SunDell Estate Nyilvánosan Muködo Részvénytársaság (BUSE:SUNDELL) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SunDell Estate Nyilvánosan Muködo Részvénytársaság

What Is SunDell Estate Nyilvánosan Muködo Részvénytársaság's Debt?

As you can see below, SunDell Estate Nyilvánosan Muködo Részvénytársaság had Ft16.4b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is SunDell Estate Nyilvánosan Muködo Részvénytársaság's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SunDell Estate Nyilvánosan Muködo Részvénytársaság had liabilities of Ft8.50b due within 12 months and liabilities of Ft18.9b due beyond that. Offsetting this, it had Ft91.7m in cash and Ft3.62b in receivables that were due within 12 months. So its liabilities total Ft23.7b more than the combination of its cash and short-term receivables.

SunDell Estate Nyilvánosan Muködo Részvénytársaság has a market capitalization of Ft62.7b, so it could very likely raise cash to ameliorate 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 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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

SunDell Estate Nyilvánosan Muködo Részvénytársaság's net debt to EBITDA ratio is 10.8 which suggests rather high debt levels, but its interest cover of 9.7 times suggests the debt is easily serviced. Overall we'd say it seems likely the company is carrying a fairly heavy swag of debt. SunDell Estate Nyilvánosan Muködo Részvénytársaság grew its EBIT by 7.3% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. There's no doubt that we learn most about debt from the balance sheet. But it is SunDell Estate Nyilvánosan Muködo Részvénytársaság's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, SunDell Estate Nyilvánosan Muködo Részvénytársaság saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, SunDell Estate Nyilvánosan Muködo Részvénytársaság's net debt to EBITDA left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making SunDell Estate Nyilvánosan Muködo Részvénytársaság stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example SunDell Estate Nyilvánosan Muködo Részvénytársaság has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com