Howard Marks put 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 every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Wilh. Wilhelmsen Holding ASA (OB: WWI) uses debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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 uses is to look at its cash flow and debt together.
Check out our latest analysis for Wilh. Wilhelmsen Holding
What is Wilh. The debt of Wilhelmsen Holding?
The image below, which you can click for more details, shows that in June 2021, Wilh. Wilhelmsen Holding had debt of US $ 460.0 million, compared to US $ 436.0 million in one year. However, given that it has a cash reserve of US $ 340.0 million, its net debt is less, at approximately US $ 120.0 million.
How healthy is Wilh. Wilhelmsen Holding balance sheet?
By zooming in on the latest balance sheet data, we can see that Wilh. Wilhelmsen Holding had debt of US $ 576.0 million due within 12 months and debt of US $ 600.00 million due thereafter. In return, he had $ 340.0 million in cash and $ 177.0 million in receivables due within 12 months. Its liabilities therefore total US $ 659.0 million more than the combination of its cash and short-term receivables.
This shortfall is sizable compared to his market cap of $ 915.8 million, so he suggests shareholders keep an eye on Wilh. Use of debt by Wilhelmsen Holding. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Wilh. Wilhelmsen Holding’s net debt is only 1.3 times its EBITDA. And its EBIT easily covers its interest costs, being 14.6 times higher. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On the other hand, Wilh. Wilhelmsen Holding has seen its EBIT fall by 5.2% over the past twelve months. If profits continue to decline at this rate, the company may find it increasingly difficult to manage debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the future profits, more than anything, that will determine Wilh. the ability of Wilhelmsen Holding 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 Profit Forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. For the past three years, Wilh. Wilhelmsen Holding actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.
Our point of view
The two Wilh. The ability of Wilhelmsen Holding to cover its interest expense with its EBIT and its conversion of EBIT into free cash flow has reinforced our ability to manage its debt. On the other hand, its level of total liabilities makes us a little less comfortable with its debt. When we consider all the elements mentioned above, it seems to us that Wilh. Wilhelmsen Holding manages its debt quite well. That said, the load is heavy enough that we recommend that any shareholder watch it closely. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example – Wilh. Wilhelmsen Holding a 2 warning signs we think you should be aware.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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