Is Wihlborgs Fastigheter (STO:WIHL) A Risky Investment?

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. Importantly, Wihlborgs Fastigheter AB (publ) (STO:WIHL) does carry 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See 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 Wihlborgs Fastigheter had kr22.8b of debt in March 2021, down from kr24.4b, one year before. And it doesn't have much cash, so its net debt is about the same.

A Look At Wihlborgs Fastigheter's Liabilities

According to the last reported balance sheet, Wihlborgs Fastigheter had liabilities of kr3.42b due within 12 months, and liabilities of kr24.7b due beyond 12 months. Offsetting this, it had kr382.0m in cash and kr293.0m in receivables that were due within 12 months. So it has liabilities totalling kr27.4b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of kr30.9b, so it does suggest shareholders should keep an eye on Wihlborgs Fastigheter's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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.

With a net debt to EBITDA ratio of 10.7, it's fair to say Wihlborgs Fastigheter does have a significant amount of debt. But the good news is that it boasts fairly comforting interest cover of 6.5 times, suggesting it can responsibly service its obligations. Sadly, Wihlborgs Fastigheter's EBIT actually dropped 2.7% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wihlborgs Fastigheter can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Wihlborgs Fastigheter recorded free cash flow worth a fulsome 81% 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

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 the good news is it seems to be able to convert EBIT to free cash flow with ease. We think that Wihlborgs Fastigheter's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Wihlborgs Fastigheter (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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