Is Wihlborgs Fastigheter (STO:WIHL) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Wihlborgs Fastigheter AB (publ) (STO:WIHL) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Wihlborgs Fastigheter

How Much Debt Does Wihlborgs Fastigheter Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Wihlborgs Fastigheter had kr27.0b of debt, an increase on kr23.2b, over one year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Wihlborgs Fastigheter's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wihlborgs Fastigheter had liabilities of kr2.17b due within 12 months and liabilities of kr31.7b due beyond that. On the other hand, it had cash of kr224.0m and kr406.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr33.2b.

Given this deficit is actually higher than the company's market capitalization of kr23.7b, we think shareholders really should watch Wihlborgs Fastigheter's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Wihlborgs Fastigheter's net debt to EBITDA ratio is 11.9 which suggests rather high debt levels, but its interest cover of 8.2 times suggests the debt is easily serviced. Our best guess is that the company does indeed have significant debt obligations. Wihlborgs Fastigheter grew its EBIT by 9.2% in the last year. Whilst that hardly knocks our socks off it is a positive when it comes to debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wihlborgs Fastigheter'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Wihlborgs Fastigheter generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Neither Wihlborgs Fastigheter's ability handle its debt, based on its EBITDA, nor its level of total liabilities gave us confidence in its ability to take on more debt. But its conversion of EBIT to free cash flow tells a very different story, and suggests some resilience. Taking the abovementioned factors together we do think Wihlborgs Fastigheter's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. 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. For instance, we've identified 2 warning signs for Wihlborgs Fastigheter (1 is significant) you should be aware of.

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.

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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.