Is Bredband2 i Skandinavien (STO:BRE2) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Bredband2 i Skandinavien AB (publ) (STO:BRE2) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bredband2 i Skandinavien

What Is Bredband2 i Skandinavien's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Bredband2 i Skandinavien had kr138.9m of debt, an increase on none, over one year. However, it also had kr83.4m in cash, and so its net debt is kr55.5m.

How Healthy Is Bredband2 i Skandinavien's Balance Sheet?

We can see from the most recent balance sheet that Bredband2 i Skandinavien had liabilities of kr535.8m falling due within a year, and liabilities of kr213.9m due beyond that. Offsetting this, it had kr83.4m in cash and kr105.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr560.7m.

While this might seem like a lot, it is not so bad since Bredband2 i Skandinavien has a market capitalization of kr2.02b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Bredband2 i Skandinavien has a low net debt to EBITDA ratio of only 0.57. And its EBIT covers its interest expense a whopping 25.7 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, Bredband2 i Skandinavien's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Bredband2 i Skandinavien can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Happily for any shareholders, Bredband2 i Skandinavien actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, Bredband2 i Skandinavien's impressive interest cover implies it has the upper hand on its debt. But the stark truth is that we are concerned by its EBIT growth rate. All these things considered, it appears that Bredband2 i Skandinavien can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Bredband2 i Skandinavien (including 1 which makes us a bit uncomfortable) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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