Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Saab AB (publisher) (STO: SAAB B) uses debt. But does this debt worry shareholders?

When is debt dangerous?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest analysis for Saab

What is Saab’s debt?

As you can see below, Saab had a debt of 7.22 billion kr in December 2021, compared to 7.56 billion kr the previous year. But on the other hand, he also has 11.9 billion kr in cash which leads to a net cash position of 4.66 billion kr.

A look at Saab’s responsibilities

According to the latest published balance sheet, Saab had liabilities of kr 25.3 billion maturing within 12 months and liabilities of kr 16.5 billion maturing beyond 12 months. In return, he had 11.9 billion kr in cash and 16.3 billion kr in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 13.6 billion kr.

Saab has a market capitalization of 46.1 billion kr, so it could very likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt. While it has liabilities to note, Saab also has more cash than debt, so we’re pretty confident it can manage its debt safely.

What is even more impressive is that Saab increased its EBIT by 197% year-over-year. If sustained, this growth will make debt even more manageable in years to come. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Saab’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. Although Saab has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it’s building (or erodes) this cash balance. Over the past three years, Saab has recorded free cash flow of 68% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.

Abstract

Although Saab has more liabilities than liquid assets, it also has a net cash position of 4.66 billion kr. And it has impressed us with its 197% EBIT growth over the past year. We therefore do not believe that Saab’s use of debt is risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example – Saab has 3 warning signs we think you should know.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Hong Kong and Shanghai Hotels, Limited (HKG:45) has a debt on its balance sheet. But should shareholders worry about its use of debt?

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest analysis for Hongkong and Shanghai Hotels

How much debt do Hong Kong and Shanghai hotels have?

As you can see below, at the end of December 2021, hotels in Hong Kong and Shanghai had a debt of HK$13.4 billion, compared to HK$11.2 billion a year ago. Click on the image for more details. However, since it has a cash reserve of HK$479.0 million, its net debt is lower at around HK$12.9 billion.

How healthy are the balance sheets of hotels in Hong Kong and Shanghai?

According to the latest published balance sheet, hotels in Hong Kong and Shanghai had liabilities of HK$3.76 billion due within 12 months and liabilities of HK$15.1 billion due beyond 12 months. On the other hand, it had cash of HK$479.0 million and HK$378.0 million of receivables within one year. It therefore has liabilities totaling HK$18.0 billion more than its cash and short-term receivables, combined.

Given that this deficit is actually larger than the company’s market capitalization of HK$13.8 billion, we think shareholders should really be watching Hong Kong and Shanghai hotel debt levels, like a parent who watches her child ride a bike for the first time. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Hongkong and Shanghai Hotels can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Last year, Hong Kong and Shanghai Hotels was not profitable in terms of EBIT, but managed to increase its turnover by 28%, to HK$3.5 billion. With a little luck, the company will be able to progress towards profitability.

Caveat Emptor

While we can certainly appreciate Hongkong and Shanghai Hotels’ revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. To be precise, the EBIT loss amounted to HK$105 million. Considering that alongside the liabilities mentioned above, we are nervous about the business. It would have to quickly improve its functioning so that we are interested in it. Not least because it had a negative free cash flow of HK$662 million over the past twelve months. That means it’s on the risky side of things. For riskier companies like Hongkong and Shanghai Hotels, I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies SFL Corporation Ltd. (NYSE:SFL) uses debt. But does this debt worry shareholders?

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for SFL

What is SFL’s debt?

As you can see below, at the end of December 2021, SFL had $1.89 billion in debt, up from $1.68 billion a year ago. Click on the image for more details. However, he also had $166.8 million in cash, so his net debt is $1.72 billion.

A look at SFL’s liabilities

According to the last published balance sheet, SFL had liabilities of $400.3 million maturing within 12 months and liabilities of $2.08 billion maturing beyond 12 months. On the other hand, it had liquidities of 166.8 million dollars and 8.56 million dollars of receivables within one year. It therefore has liabilities totaling $2.30 billion more than its cash and short-term receivables, combined.

The deficiency here weighs heavily on the $1.22 billion business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. . So we definitely think shareholders need to watch this one closely. Ultimately, SFL would likely need a significant recapitalization if its creditors demanded repayment.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

SFL shareholders are faced with the double whammy of a high net debt to EBITDA ratio (5.0) and a fairly low interest coverage, since EBIT is only 2.4 times the cost of ‘interests. This means that we would consider him to be heavily indebted. The good news is that SFL has improved its EBIT by 3.1% over the last twelve months, thus gradually reducing its level of debt in relation to its results. There is no doubt that we learn the most about debt from the balance sheet. But it is ultimately the company’s future profitability that will decide whether SFL can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the taxman may love accounting profits, lenders only accept cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the last three years, SFL has recorded a free cash flow of 24% of its EBIT, which is lower than expected. It’s not great when it comes to paying off debt.

Our point of view

At first glance, SFL’s net debt to EBITDA ratio left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant on the busiest night of the year. But at least its EBIT growth rate isn’t that bad. We are very clear that we consider SFL to be quite risky indeed, given the health of its balance sheet. For this reason, we are quite cautious about the stock and believe shareholders should keep a close eye on its liquidity. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, SFL has 5 warning signs (and 2 that make us uncomfortable) that we think you should know about.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Schneider Electric SE (EPA:SU) uses debt in its business. But should shareholders worry about its use of debt?

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies 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 Schneider Electric

What is Schneider Electric’s debt?

As you can see below, Schneider Electric had 9.75 billion euros in debt in December 2021, compared to 10.5 billion euros the previous year. However, he also had €2.63 billion in cash, so his net debt is €7.12 billion.

A look at Schneider Electric’s responsibilities

The latest balance sheet data shows that Schneider Electric had liabilities of 14.2 billion euros due within one year and liabilities of 12.2 billion euros due thereafter. In return, it had 2.63 billion euros in cash and 8.61 billion euros in receivables due within 12 months. It therefore has liabilities totaling 15.2 billion euros more than its cash and short-term receivables, combined.

Of course, Schneider Electric has a titanic market capitalization of 83.3 billion euros, so these liabilities are probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Schneider Electric’s net debt is only 1.3 times its EBITDA. And its EBIT easily covers its interest charges, which is 34.9 times the size. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Another good sign, Schneider Electric was able to increase its EBIT by 24% in twelve months, thus facilitating the repayment of its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is ultimately the company’s future profitability that will decide whether Schneider Electric can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Schneider Electric has recorded free cash flow representing 80% of its EBIT, which is higher than what we usually expect. This puts him in a very strong position to repay his debt.

Our point of view

Fortunately, Schneider Electric’s impressive interest coverage means it has the upper hand on its debt. And this is only the beginning of good news since its conversion of EBIT into free cash flow is also very pleasing. Overall, we think Schneider Electric’s use of debt seems entirely reasonable and we’re not worried about that. After all, reasonable leverage can increase return on equity. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we found 2 warning signs for Schneider Electric which you should be aware of before investing here.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies ImExHS Limited (ASX:IME) uses debt. But the more important question is: what risk does this debt create?

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for ImExHS

What is ImExHS’ net debt?

You can click on the graph below for historical figures, but it shows that in December 2021, ImExHS had a debt of 2.37 million Australian dollars, an increase of 1.60 million Australian dollars, on a year. But on the other hand, he also has A$4.19 million in cash, resulting in a net cash position of A$1.82 million.

How strong is ImExHS’ balance sheet?

According to the latest published balance sheet, ImExHS had liabilities of A$7.10 million due within 12 months and liabilities of A$2.01 million due beyond 12 months. On the other hand, it had cash of A$4.19 million and A$7.01 million of receivables due within one year. So he actually has 2.09 million Australian dollars Continued liquid assets than total liabilities.

This short-term liquidity is a sign that ImExHS could probably service its debt easily, as its balance sheet is far from stretched. In short, ImExHS has a net cash position, so it’s fair to say that they don’t have a lot of debt! The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether ImExHS can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Over 12 months, ImExHS reported revenue of A$14 million, a 24% gain, although it reported no earnings before interest and tax. The shareholders probably have their fingers crossed that she can make a profit.

So how risky is ImExHS?

We have no doubt that loss-making companies are, in general, more risky than profitable companies. And the fact is that over the past twelve months, ImExHS has been losing money in earnings before interest and taxes (EBIT). And over the same period, it had a negative free cash outflow of A$5.5 million and recorded a book loss of A$4.7 million. But at least it has A$1.82m on the balance sheet to spend on near-term growth. ImExHS’ revenue growth has shone over the past year, so it may well be able to turn a profit in due course. By investing before these profits, shareholders take on more risk in the hope of greater rewards. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that ImExHS displays 4 warning signs in our investment analysis and 1 of them is potentially serious…

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Mostly, InvoCare Limited (ASX:IVC) is in debt. But the more important question is: what risk does this debt create?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for InvoCare

What is InvoCare’s debt?

The image below, which you can click on for more details, shows that InvoCare had A$188.9 million in debt at the end of December 2021, a reduction from A$247.2 million over a year. On the other hand, he has A$53.6 million in cash, resulting in a net debt of around A$135.3 million.

How strong is InvoCare’s balance sheet?

The latest balance sheet data shows that InvoCare had liabilities of A$197.6 million due within one year, and liabilities of A$978.6 million falling due thereafter. As compensation for these obligations, it had cash of A$53.6 million as well as receivables valued at A$57.2 million and due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of A$1.07 billion.

This is a mountain of leverage compared to its market capitalization of AU$1.72 billion. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

Given that net debt is only 1.3x EBITDA, it is initially surprising to see that InvoCare’s EBIT has a low interest coverage of 2.1x. So either way, it’s clear that debt levels are not negligible. Importantly, InvoCare has grown its EBIT by 66% over the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But future revenues, more than anything, will determine InvoCare’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, InvoCare has nearly broken even on a free cash flow basis. Some might say that’s a concern, given how easily he could reduce his debt.

Our point of view

InvoCare’s interest coverage and conversion of EBIT to free cash flow is certainly weighing on it, in our view. But the good news is that it looks like it could easily increase its EBIT. We think InvoCare’s debt makes it a bit risky, after looking at the aforementioned data points together. Not all risk is bad, as it can increase stock price returns if it pays off, but this leverage risk is worth keeping in mind. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To this end, you should be aware of the 1 warning sign we spotted with InvoCare.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Mostly, Super Microcomputer, Inc. (NASDAQ:SMCI) is in debt. But should shareholders worry about its use of debt?

When is debt a problem?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies 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 review for Super Micro Computer

What is Super Micro Computer’s net debt?

As you can see below, at the end of December 2021, Super Micro Computer had $315.9 million in debt, up from $45.5 million a year ago. Click on the image for more details. However, he also had $247.4 million in cash, so his net debt is $68.5 million.

A Look at Super Micro Computer’s Responsibilities

Zooming in on the latest balance sheet data, we can see that Super Micro Computer had liabilities of US$1.20 billion due within 12 months and liabilities of US$290.2 million due beyond. In return, he had $247.4 million in cash and $617.5 million in receivables due within 12 months. It therefore has liabilities totaling $624.8 million more than its cash and short-term receivables, combined.

While that might sound like a lot, it’s not too bad since Super Micro Computer has a market capitalization of US$2.14 billion, so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it is essential to examine closely whether it can manage its debt without dilution.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Super Micro Computer has net debt of just 0.41 times EBITDA, suggesting it could increase its leverage without breaking a sweat. And remarkably, although she has net debt, she has actually received more interest in the last twelve months than she has had to pay. So there’s no doubt that this company can go into debt and still be cool as a cucumber. Another good sign, Super Micro Computer was able to increase its EBIT by 24% in twelve months, thus facilitating the repayment of its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Super Micro Computer can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Super Micro Computer has actually had a cash outflow, overall. Debt is generally more expensive and almost always riskier in the hands of a company with negative free cash flow. Shareholders should hope for an improvement.

Our point of view

Super Micro Computer’s ability to cover its interest charges with its EBIT and its net debt to EBITDA has reinforced our ability to manage its debt. But truth be told, his conversion from EBIT to free cash flow had us biting our nails. Given this range of data points, we believe Super Micro Computer is in a good position to manage its level of leverage. But be warned: we believe debt levels are high enough to warrant continued monitoring. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 1 warning sign for Super Micro Computer you should be aware.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies SkyWest, Inc. (NASDAQ:SKYW) uses debt. But should shareholders worry about its use of debt?

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for SkyWest

What is SkyWest’s net debt?

The chart below, which you can click on for more details, shows that SkyWest had US$3.11 billion in debt as of December 2021; about the same as the previous year. However, since he has a cash reserve of $860.4 million, his net debt is less, at around $2.25 billion.

How strong is SkyWest’s balance sheet?

Zooming in on the latest balance sheet data, we can see that SkyWest had liabilities of US$1.19 billion due within 12 months and liabilities of US$3.66 billion due beyond. In compensation for these obligations, it had cash of US$860.4 million as well as receivables valued at US$65.3 million and maturing within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $3.93 billion.

This deficit casts a shadow over the $1.35 billion company, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, SkyWest would likely need a major recapitalization if its creditors were to demand repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine SkyWest’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Last year, SkyWest was not profitable on an EBIT level, but managed to increase its revenue by 28%, to $2.7 billion. With a little luck, the company will be able to progress towards profitability.

Caveat Emptor

Even though SkyWest has managed to grow its revenue quite slickly, the harsh truth is that it is losing money on the EBIT line. Indeed, it lost $62 million in EBIT. Considering the significant liabilities mentioned above, we are extremely wary of this investment. Of course, he may be able to improve his situation with a bit of luck and good execution. But on the plus side, the company actually made a statutory profit of US$112 million and free cash flow of US$150 million. So you could say that there is still a chance that this could put things on the right track. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 3 warning signs for SkyWest you should be aware.

If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Cortus Energy AB (publisher) (STO:CE) uses debt. But does this debt worry shareholders?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

Discover our latest analysis for Cortus Energy

What is Cortus Energy’s debt?

As you can see below, Cortus Energy had a debt of 15.0 million kr in December 2021, compared to 81.9 million kr the previous year. But he also has 48.8 million kr in cash to offset this, which means he has a net cash of 33.8 million kr.

How strong is Cortus Energy’s balance sheet?

According to the latest published balance sheet, Cortus Energy had liabilities of 28.9 million kr due within 12 months and liabilities of 11.4 million kr due beyond 12 months. In return, it had 48.8 million kr in cash and 2.15 million kr in debt due within 12 months. Thus, he can boast of having 10.7 million kr more cash than total Passives.

Given the size of Cortus Energy, it appears its cash is well balanced against its total liabilities. It is therefore very unlikely that the 558.7 million kr company will run out of cash, but it is still worth keeping an eye on the balance sheet. Simply put, the fact that Cortus Energy has more cash than debt is arguably a good indication that it can safely manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Cortus Energy will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Given its lack of significant operating revenue, Cortus Energy shareholders are no doubt hoping it can finance itself until it can sell fuels.

So how risky is Cortus Energy?

Statistically speaking, businesses that lose money are riskier than those that make money. And we note that Cortus Energy posted a loss in earnings before interest and taxes (EBIT) over the past year. And during the same period, it recorded a negative free cash outflow of 73 million kr and recorded an accounting loss of 79 million kr. With only 33.8 million kr on the balance sheet, it looks like it will soon have to raise capital again. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 6 warning signs for Cortus Energy (3 are significant) of which you should be aware.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies AB Volvo (publisher) (STO: VOLV B) uses debt. But the real question is whether this debt makes the business risky.

When is debt a problem?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for AB Volvo

What is AB Volvo’s debt?

As you can see below, AB Volvo had 147.5 billion kr in debt, as of December 2021, which is about the same as the previous year. You can click on the graph for more details. However, he also had 62.3 billion kr in cash, so his net debt is 85.2 billion kr.

A look at AB Volvo’s responsibilities

According to the latest published balance sheet, AB Volvo had liabilities of 202.4 billion kr due within 12 months and liabilities of 169.3 billion kr due beyond 12 months. In return, he had 62.3 billion kr in cash and 59.3 billion kr in debt due within 12 months. Thus, its liabilities total 250.1 billion kr more than the combination of its cash and short-term receivables.

This deficit is considerable compared to its very large market capitalization of 374.6 billion kr, so it suggests shareholders to keep an eye on AB Volvo’s use of debt. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

AB Volvo’s net debt to EBITDA ratio of around 1.7 suggests only moderate use of debt. And its towering EBIT of 53.3 times its interest expense means that the debt burden is as light as a peacock feather. On top of that, AB Volvo has grown its EBIT by 52% over the last twelve months, and this growth will help manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine AB Volvo’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, AB Volvo has recorded free cash flow of 36% of EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.

Our point of view

AB Volvo’s ability to cover its interest charges with its EBIT and its EBIT growth rate has given us comfort in its ability to manage its debt. That said, its level of total liabilities makes us somewhat aware of potential future risks to the balance sheet. Given this range of data points, we believe that AB Volvo is in a good position to manage its level of debt. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we found 2 warning signs for AB Volvo which you should be aware of before investing here.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.