Wihlborgs Fastigheter (STO:WIHL) Has A Somewhat Strained Balance Sheet

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. We note that Wihlborgs Fastigheter AB (publ) (STO:WIHL) does have debt on its balance sheet. 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

What Is Wihlborgs Fastigheter's Net Debt?

As you can see below, Wihlborgs Fastigheter had kr23.5b of debt at June 2021, down from kr24.5b a year prior. However, because it has a cash reserve of kr496.0m, its net debt is less, at about kr23.0b.

How Strong Is Wihlborgs Fastigheter's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wihlborgs Fastigheter had liabilities of kr2.35b due within 12 months and liabilities of kr26.5b due beyond that. Offsetting this, it had kr496.0m in cash and kr241.0m in receivables that were due within 12 months. So its liabilities total kr28.1b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of kr29.7b, 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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

As it happens Wihlborgs Fastigheter has a fairly concerning net debt to EBITDA ratio of 11.1 but very strong interest coverage of 11.6. 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 4.7% 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. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 puts it in a very strong position to pay down debt.

Our View

While Wihlborgs Fastigheter's net debt to EBITDA has us nervous. For example, its conversion of EBIT to free cash flow and interest cover give us some confidence in its ability to manage its debt. Looking at all the angles mentioned above, it does seem to us that Wihlborgs Fastigheter is a somewhat risky investment as a result of its debt. 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. 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 3 warning signs for Wihlborgs Fastigheter (2 are significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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