We Think Sláturfélags Suðurlands svf (ICE:SFS B) Is Taking Some Risk With Its Debt

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 can see that Sláturfélags Suðurlands svf. (ICE:SFS B) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sláturfélags Suðurlands svf

How Much Debt Does Sláturfélags Suðurlands svf Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Sláturfélags Suðurlands svf had Kr2.62b of debt, an increase on Kr2.52b, over one year. On the flip side, it has Kr563.6m in cash leading to net debt of about Kr2.06b.

A Look At Sláturfélags Suðurlands svf's Liabilities

We can see from the most recent balance sheet that Sláturfélags Suðurlands svf had liabilities of Kr1.75b falling due within a year, and liabilities of Kr3.53b due beyond that. Offsetting these obligations, it had cash of Kr563.6m as well as receivables valued at Kr1.47b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kr3.25b.

This deficit casts a shadow over the Kr1.54b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Sláturfélags Suðurlands svf would likely require a major re-capitalisation if it had to pay its creditors today.

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.

Even though Sláturfélags Suðurlands svf's debt is only 2.1, its interest cover is really very low at 2.1. This does suggest the company is paying fairly high interest rates. In any case, it's safe to say the company has meaningful debt. Notably, Sláturfélags Suðurlands svf made a loss at the EBIT level, last year, but improved that to positive EBIT of Kr545m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sláturfélags Suðurlands svf'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Sláturfélags Suðurlands svf generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

To be frank both Sláturfélags Suðurlands svf's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Once we consider all the factors above, together, it seems to us that Sláturfélags Suðurlands svf's debt is making it 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Sláturfélags Suðurlands svf (at least 2 which are concerning) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.