Is Bonheur (OB:BONHR) Using Debt Sensibly?

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.' 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. As with many other companies Bonheur ASA (OB:BONHR) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Bonheur

How Much Debt Does Bonheur Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Bonheur had debt of kr11.0b, up from kr9.86b in one year. However, it also had kr5.21b in cash, and so its net debt is kr5.81b.

How Strong Is Bonheur's Balance Sheet?

We can see from the most recent balance sheet that Bonheur had liabilities of kr3.50b falling due within a year, and liabilities of kr11.9b due beyond that. Offsetting this, it had kr5.21b in cash and kr1.82b in receivables that were due within 12 months. So it has liabilities totalling kr8.35b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of kr9.76b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bonheur'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.

Over 12 months, Bonheur made a loss at the EBIT level, and saw its revenue drop to kr6.5b, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

Not only did Bonheur's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost kr782m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through kr2.4b of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Bonheur that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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