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

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. Importantly, Wihlborgs Fastigheter AB (publ) (STO:WIHL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Wihlborgs Fastigheter

What Is Wihlborgs Fastigheter's Debt?

You can click the graphic below for the historical numbers, but it shows that Wihlborgs Fastigheter had kr23.1b of debt in September 2021, down from kr24.8b, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Wihlborgs Fastigheter's Balance Sheet?

According to the last reported balance sheet, Wihlborgs Fastigheter had liabilities of kr1.00b due within 12 months, and liabilities of kr27.6b due beyond 12 months. On the other hand, it had cash of kr205.0m and kr246.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr28.1b.

This is a mountain of leverage relative to its market capitalization of kr29.6b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Strangely Wihlborgs Fastigheter has a sky high EBITDA ratio of 10.9, implying high debt, but a strong interest coverage of 20.3. This means that unless the company has access to very cheap debt, that interest expense will likely grow in the future. Unfortunately, Wihlborgs Fastigheter saw its EBIT slide 4.1% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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

While Wihlborgs Fastigheter's net debt to EBITDA has us nervous. To wit both its interest cover and conversion of EBIT to free cash flow were encouraging signs. We think that Wihlborgs Fastigheter's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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 example, we've discovered 4 warning signs for Wihlborgs Fastigheter (2 make us 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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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.