Does OEM International (STO:OEM B) Have A Healthy Balance Sheet?

Simply Wall St
February 20, 2022
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that OEM International AB (publ) (STO:OEM B) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for OEM International

What Is OEM International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 OEM International had kr131.0m of debt, an increase on kr101.0m, over one year. On the flip side, it has kr122.0m in cash leading to net debt of about kr9.00m.

OM:OEM B Debt to Equity History February 20th 2022

How Strong Is OEM International's Balance Sheet?

The latest balance sheet data shows that OEM International had liabilities of kr543.0m due within a year, and liabilities of kr130.0m falling due after that. Offsetting these obligations, it had cash of kr122.0m as well as receivables valued at kr637.0m due within 12 months. So it actually has kr86.0m more liquid assets than total liabilities.

This state of affairs indicates that OEM International's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the kr11.5b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, OEM International has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With debt at a measly 0.016 times EBITDA and EBIT covering interest a whopping 586 times, it's clear that OEM International is not a desperate borrower. Indeed relative to its earnings its debt load seems light as a feather. On top of that, OEM International grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is OEM International'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 we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, OEM International produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, OEM International's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! We think OEM International is no more beholden to its lenders, than the birds are to birdwatchers. To our minds it has a healthy happy balance sheet. 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. We've identified 2 warning signs with OEM International , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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