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.

Loan app debt collectors in Nigeria have continued to shame defaulting borrowers against the country’s cyber laws, while loan app companies charge borrowers high interest rates.

Digital lending apps trick borrowers by posting lower interest rates on the Google Play Store but borrowers saw their loan terms increase as loan applications raised interest rates by more than 50%.

Interest rates can be as high as 75 to 395% per year.

---

READ ALSO:

Consumer Protection, Police, raid Gocash, Okash, Easy moni, other loan shark companies in Lagos

Illegal loan apps ignore Nigerian cyber laws and continue to shame customers

How fintech loan sharks in Nigeria bully cyber bullies, trap customers in debt

---

– Advertising –

Surveys by CIRI show that LCredit, 9credit, LionCash, Nkash, ForNaira, CycleCash, Cashrain, Mikoloan, Supercash, Xcredit, ICoin, PalmCredit and CashLion are some of the lending apps involved in the deception scheme.

Lending applications on the Google Play Store who offer short-term loans are mandated by Google policy rules to give borrowers at least 60 days from the date of issue to repay any loan.

Loan collectors have declared defaulters dead, calling and circulating defamatory messages to family and friends.

Here’s how the debt collector works.

A debt collector identified as Tobilola who works for LCredit with first-hand knowledge of their operations said CIRI that recovery agents are divided into five teams with a team leader assigned to each.

Teams are led by a team leader who assigns clients to debt collectors based on how long they have defaulted on their loans.

– Advertising –

“We are divided into five groups. Most debt collectors prefer first to third shift because they focus on short-term delinquent loans, which are easier to collect than long-term loans.

“We’re assigned 400 customers a week to each collection agent in the call center, and they don’t care what you do to collect delinquent loans from customers,” he said.

There is no official figure on how many loan companies exist in Nigeria; however, debt collection is an essential part of their operations.

Agents receive a weekly bonus of three percent of the total amount they collect if they reach their weekly goal.

The monthly salary of a debt collection agent at LCredit is N50,000, while the top three performers of the week receive between N10,000 and N15,000 as an incentive.

He said customers who defaulted on their loans often asked for more time to escape the constant harassment, but would still carry on with the debt collector’s eyes on the bonus.

“Team leaders always threaten to fire us if we don’t achieve the goal, and when they verbally insult us, we tend to transfer the aggression onto the customers using any means possible to recover the company money,” he said.

– Advertising –

On a public group On Facebook, loan application client Victoria Eyo Ekpo revealed that she was also bullied by a loan application agent and vowed not to repay the loan.

She borrowed the sum of N15,000 from Deloan and had defaulted on her repayment plan and the next thing she saw was a circulation of her obituary photo.

“This is what Deloan (app) sent me. I will never pay. They called my mum and insulted her. God help us,” she said.

There are no guidelines on the training of loan collectors and the methods they can adopt for collection.

Defined here data debt and how to manage it when preparing for digital transformation

Data debt is a term based on the concept of technical debt. Also called technical debt, a word from the world of Agile software development. Technology debt refers to the cost of deferring a software feature or choosing a quick and simple solution instead of a more thoughtful solution that would take longer to achieve. The Data Governance and DataOps disciplines will serve as instruments to repay the data debt and thus reduce it to a large extent.

The concept of data debt can be used as a powerful argument in discussions with key stakeholders to drive new business processes and policies related to data. Data debt should be seen as part of a transformation journey to realize benefits. Digital transformation is a necessary step for companies that want to strengthen their capabilities and differentiate themselves from the competition. Digital transformation should not be locked in without considering another type of data asset.

Data debt and digital transformation:

Digitizing a business can be a complex process. The goal of digital transformation is to be more agile, flexible, customer-centric, or automated. Data debt does not lead to results or allow some of the more useful options such as digital twins or artificial intelligence to work.

Technical debt is complicated. Incomplete data only leads to making decisions with an incomplete picture of where the organization stands, failing to deliver the expected results, or worse, developing strategies that result in losses. It’s data debt. This can happen when companies take shortcuts or create workarounds to deal with bad data.

All of these problems lead to an unhealthy data ecosystem. This results in data debt. It wastes time, costs money, undermines decisions, causes platform stability issues or outages, and can render advanced technology useless.

Hindrance to digital transformation:

Any digital transformation strategy must consider technical debt. Technical debt is the price a company pays for short-term technological fixes. This hampers their ability to innovate and adapt to the digital age. This can greatly hamper an organization’s pace of innovation.

Technical debt increases and imposes additional fixed operating costs on the business, diverting valuable investments in innovation and new capabilities. Technical debt is common for products, especially during a digital transformation. And it’s important to make sure it’s kept under control. Otherwise, it becomes too difficult to rectify, like a snowball rolling downhill, constantly growing in size and picking up sticks and pebbles along the way.

Technical/Data Debt Issues:

Technical debt can pose different problems because the complexity of the code has led to new defects in the product. The code can also be very difficult to understand and the process of adding new features often takes time, which adds to the challenge.

Some organizations have multiple legacy products to upgrade or a large product that needs to be split into multiple microservices. Other times, the duplicate code needs to be updated or changed in multiple places to fix the problem. Organizations find it difficult to safely remove obsolete libraries or experience performance issues due to the high impact of change. To avoid these extreme consequences, they must take full control of the technical debt.

Work around technical debt issues:

• Align IT and business strategy to clarify the overall business strategy and define the capabilities needed at the enterprise level.
• By prioritizing automation and elevating human innovation, time and resources can be freed up so organizations can focus on building a culture of innovation and enabling long-term thinking to drive revenue growth.
• By choosing flexible consumption models that allow them to pay only for what is consumed and preserve budgets when workloads are bound to fluctuate.
• Organizations focused on delivering short-term projects will not be able to reduce growing technical debt.

Conclusion: Data is essential to digital transformation. Ignoring data debt will not only affect daily operations, but will also increase as your data volume grows. If data debt is reduced, cutting-edge technology will open up, attracting good staff, happy customers, competitors moving away, and therefore having a healthy bottom line.

Share this article

Do the sharing

About the Author

More info about the author

Author of the article:

Publication date :

March 11, 2022 • 48 minutes ago • 3 minute read • Join the conversation

Content of the article

NEW YORK – Cash savers are currently between a rock and a hard place.

Interest rates on typical places to store money, such as savings accounts, are near all-time lows.

Meanwhile, inflation rates are the highest in decades – US consumer prices jumped in February to an annual growth rate of 7.9%, according to the Labor Department.

This means that the purchasing power of your savings is gradually eroding each month.

“We definitely get more questions about inflation,” says Roger Young, director of thought leadership at Baltimore-based investment manager T. Rowe Price. “We’ve had the luxury for many years of not having to worry about it, and it’s a good reminder that inflation shouldn’t be ignored.”

Content of the article

Cash is the mainstay of short-term savings – perhaps an emergency fund for three to six months of expenses to cover job loss or car repairs. You might also need money if you’re saving for a down payment on a house.

But the harsh reality is that there aren’t many great options for where to keep it. That said, some strategies are smarter than others. Here’s what to do with that precious cash:

SAVINGS ACCOUNTS AND CDs

The Federal Reserve has signaled that higher interest rates are in the future to help curb inflation, so more attractive rates should start appearing in basic banking offerings like savings accounts. So far, the effects have been marginal.

When personal finance site Bankrate polled https://www.bankrate.com/banking/savings/rates for the best savings account rates for March, the top results included Comenity Direct (0.60 annual percentage return %), Barclays Online (0.55%) and Ally Bank Online (0.50%).

Content of the article

Certificates of deposit offer slightly better returns, although they generally require you to lock up money for an extended period. The top two-year CDs right now include Pentagon Federal Credit Union (1.25%), Live Oak Bank (1.1%) and Popular Direct (1.1%), according to Bankrate.

SHORT TERM BONDS

In times of rising rates, long-term bond funds tend to be hit hard. But short-term bond funds can be a useful place to hold your cash – generating more potential return than savings accounts, while offering less risk than longer-duration fixed-income securities.

Funds rated gold by Chicago-based research firm Morningstar include the Vanguard Short-Term Corporate Bond Index (VSTBX), the T. Rowe Price Short Duration Income I (TSIDX), and the PIMCO Enhanced Low Duration Active ETF ( LDUR).

Content of the article

Treasury inflation-protected securities (TIPS), whose principal increases with the rate of inflation, provide some shelter. “ADVICE is the best of a multitude of mediocre options,” advises Matt Bacon, a financial planner in Gaithersburg, Maryland.

DIVIDEND-PAYING SHARES

Dividend-paying stocks are worth pursuing for better returns. The average return on the S&P 500 is around 1.4%, although you can find many quality companies paying more than 2 or 3% – many multiples of the rate you’ll find on savings accounts.

However, there are some risks. The value of the underlying securities can fall at any time, so if you are forced to sell in the short term, you could find yourself in a difficult situation. And dividends can be cut by companies in times of trouble, so look at companies that have a long track record of maintaining and increasing payouts, like the so-called dividend aristocrats.

Content of the article

HIGH INTEREST CREDIT CARD DEBT

If your emergency fund is covered and you have extra cash, there’s only one place to get a guaranteed return: Paying off high-interest credit card debt. Get rid of a revolving balance on a card that charges 15% per year, and you can consider it making a 15% return.

It’s a more complicated discussion when it comes to paying off mortgages, car loans or student debt, which can be locked in for the long term at attractive rates. But for credit card debt that can spiral out of control, eliminating it with cash reserves is almost always a good idea.

While these are a few ideas for getting slightly better returns on your savings, don’t go overboard and take on too much risk – which defeats the purpose of having money. money first.

“There’s no need to get too fancy with the cash portion of a wallet,” says financial planner Marco Rimassa of CFE Financial in Katy, Texas. “Particularly in this volatile investing environment, cash has a place in most asset allocations as a risk buffer – and is productive just as it is.” (Editing by Lauren Young and Rosalba O’Brien)

Share this article on your social network

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.