Warren Buffett famously said, “Volatility is not synonymous with risk.” Debt is often incurred when a business goes bankrupt, so it makes sense to consider a company’s balance sheet when considering a company’s risks.Like many other companies Royal Unibrew A/S (CPH:RBREW) uses debt. But the bigger question is how much risk does that liability create?
when debt is dangerous
Debt helps a business until it struggles to pay it back with either new capital or free cash flow. However, what happens more frequently (but costly) is when a company has to permanently dilute its shareholders and issue shares at a bargain just to strengthen its balance sheet. The advantage of debt, of course, is that it often represents cheap capital, especially when you replace the company’s dilution with the ability to reinvest at a high rate of return. It is to consider the debt together.
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How much debt does Royal Unibrew have?
You can click the chart below for historical figures, but as of September 2022, we can see that Royal Unibrew’s debt is NOK 454 million, up from NOK 360 million over the course of the year. On the contrary, it has 176 million won in cash and has a net debt of about 436 million won.
How healthy is Royal Unibrew’s balance sheet?
Zooming in on the latest balance sheet data shows that Royal Unibrew has a debt of kr.5.53b due within 12 months and a debt of kr.4.03b due after that. Offsetting this was KRW 176 million in cash and accounts receivable of KRW 15.6 billion due within 12 months. As a result, total liabilities amount to 7.83 billion won, which is more than the sum of cash and short-term debt.
While this may seem like a lot, Royal Unibrew has a market cap of kr.25.1b so it’s not too bad and could potentially strengthen its balance sheet by raising capital if needed. I have. But I’d like to be on the lookout for signs that debt poses too much risk.
By dividing net debt by earnings before interest, taxes, depreciation and amortization (EBITDA), and calculating how easily earnings before interest and taxes (EBIT) can cover earnings, a company’s Measure your debt load. Expenses (interest cover). In this way we consider both the absolute amount of debt and the interest paid on it.
Royal Unibrew’s net debt to EBITDA ratio of approximately 2.3 indicates moderate use of debt. And the high interest rate coverage of 26.9x makes us even more comfortable. Unfortunately, Royal Unibrew’s EBIT has declined by 4.1% over the last 12 months. If revenues continue to decline, managing that liability becomes as difficult as delivering hot soup on a unicycle. Clearly, the balance sheet is the starting point when analyzing debt levels. However, Royal Unibrew’s ability to strengthen its balance sheet over time will ultimately depend on the future profitability of the business. So, if you want to know what the experts think, this free report on analyst profit forecasts might be of interest to you.
But a final consideration is also important. Because a company cannot pay its debts with paper profits. I need cash. So it’s clear that we need to see if that his EBIT is leading to corresponding free cash flow. Over the last three years, Royal Unibrew has generated stable free cash flow equivalent to his 76% of his EBIT. This free cash flow allows the company to repay its debt if it needs to.
Luckily, Royal Unibrew’s impressive interest coverage shows that the company has the upper hand in debt. But to be honest, I feel that his EBIT growth rate dampens this impression a bit. All things considered, Royal Unibrew seems to have no problem handling current debt levels. On the positive side, this leverage can enhance shareholder returns, but the potential downside is the high risk of loss, which makes the balance sheet worth watching. Clearly, this is an area that deserves more attention. However, not all investment risks are on the balance sheet, far from it. Note that Royal Unibrew is shown 5 warning signs in investment analysis one of which is important…
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, don’t hesitate to discover our exclusive list of net cash growth stocks today.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …