Here's Why Torslanda Property Investment (STO:TORSAB) Has A Meaningful Debt Burden

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Torslanda Property Investment AB (publ) (STO:TORSAB) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Torslanda Property Investment

What Is Torslanda Property Investment's Debt?

As you can see below, Torslanda Property Investment had kr1.62b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had kr94.2m in cash, and so its net debt is kr1.52b.

A Look At Torslanda Property Investment's Liabilities

According to the last reported balance sheet, Torslanda Property Investment had liabilities of kr169.2m due within 12 months, and liabilities of kr1.69b due beyond 12 months. Offsetting these obligations, it had cash of kr94.2m as well as receivables valued at kr22.9m due within 12 months. So it has liabilities totalling kr1.75b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the kr1.09b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Torslanda Property Investment would probably need a major re-capitalization if its creditors were to demand repayment.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Torslanda Property Investment has a rather high debt to EBITDA ratio of 17.6 which suggests a meaningful debt load. However, its interest coverage of 4.8 is reasonably strong, which is a good sign. Notably, Torslanda Property Investment's EBIT launched higher than Elon Musk, gaining a whopping 147% on last year. There's no doubt that we learn most about debt from the balance sheet. But it is Torslanda Property Investment'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. Over the last three years, Torslanda Property Investment recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

While Torslanda Property Investment's net debt to EBITDA has us nervous. To wit both its conversion of EBIT to free cash flow and EBIT growth rate were encouraging signs. When we consider all the factors discussed, it seems to us that Torslanda Property Investment is taking some risks with its use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with Torslanda Property Investment (including 1 which is a bit unpleasant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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