Is Christian Berner Tech Trade (STO:CBTT B) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Christian Berner Tech Trade AB (publ) (STO:CBTT B) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Christian Berner Tech Trade

What Is Christian Berner Tech Trade's Net Debt?

The chart below, which you can click on for greater detail, shows that Christian Berner Tech Trade had kr101.1m in debt in March 2021; about the same as the year before. On the flip side, it has kr43.1m in cash leading to net debt of about kr57.9m.

How Healthy Is Christian Berner Tech Trade's Balance Sheet?

According to the last reported balance sheet, Christian Berner Tech Trade had liabilities of kr251.6m due within 12 months, and liabilities of kr89.6m due beyond 12 months. Offsetting this, it had kr43.1m in cash and kr94.4m in receivables that were due within 12 months. So its liabilities total kr203.7m more than the combination of its cash and short-term receivables.

Christian Berner Tech Trade has a market capitalization of kr609.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

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

Christian Berner Tech Trade's net debt is only 1.2 times its EBITDA. And its EBIT easily covers its interest expense, being 35.4 times the size. So we're pretty relaxed about its super-conservative use of debt. Fortunately, Christian Berner Tech Trade grew its EBIT by 8.1% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Christian Berner Tech Trade'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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, Christian Berner Tech Trade generated free cash flow amounting to a very robust 100% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

Happily, Christian Berner Tech Trade's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! When we consider the range of factors above, it looks like Christian Berner Tech Trade is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. To that end, you should be aware of the 4 warning signs we've spotted with Christian Berner Tech Trade .

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. 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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