Is Train Alliance Sweden (STO: TRAIN B) a risky investment?
Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ It is only natural to consider a company’s balance sheet when examining how risky it is, since debt is often involved when a company collapses. We note that Train Alliance Sweden AB (publ) (STO: TRAIN B) has debt in its balance sheet. But should shareholders be concerned that they are using the debt?
Why does debt pose a risk?
Debt is a tool to help companies grow, but if a company can not pay off its lenders, then it exists at their mercy. Part of capitalism is the process of “creative destruction” in which failed companies are nevertheless liquidated by their bankers. A more common (but still costly) event, however, is where a company has to issue shares at bargain prices, permanent dilution of shareholders, just to strengthen its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high returns. The first thing to do when considering how much debt a company is using is to look at their cash and debts together.
Check out our latest analysis for Train Alliance Sweden
What is Train Alliance Sweden’s net debt?
As you can see below, Train Alliance Sweden had debts of SEK 197.9 million, in June 2021, which is approximately the same as the year before. You can click on the chart for more information. But since it has a cash reserve of SEK 154.2 million, its net debt is smaller, approximately SEK 43.7 million.
How healthy is Train Alliance Sweden’s balance sheet?
According to the most recently reported balance sheet, Train Alliance Sweden had liabilities of SEK 29.1 million within 12 months and liabilities of SEK 191.9 million after 12 months. In light of these obligations, it had cash of SEK 154.2 million and receivables worth SEK 13.1 million within 12 months. So it has a total debt of a total of SEK 53.8 million than cash and short-term receivables.
Since listed Train Alliance Sweden shares are worth a total of SEK 2.06, it seems unlikely that this level of debt would be a major threat. But there are sufficient liabilities for us to certainly recommend to shareholders to continue to monitor the balance sheet in the future.
We measure a company’s debt burden in relation to its profitability by looking at its net debt divided by its profit before interest, tax, depreciation and amortization (EBITDA) and by calculating how easily its profit before interest and tax (EBIT) covers its interest expense (interest coverage). The advantage of this approach is that we take into account both the absolute quantity of debt (with net debt to EBITDA) and the actual interest costs associated with that debt (with its interest coverage ratio).
Train Alliance Sweden’s net debt is at a very reasonable 1.6 times EBITDA, while EBIT covered the interest expense only 2.5 times last year. Although these figures do not worry us, it is worth noting that the cost of corporate debt has a real impact. Unfortunately, Train Alliance flopped Sweden’s EBIT 13% over the past four quarters. If that decline is not stopped, it will be harder to manage their debts than to sell broccoli-flavored ice cream for a premium. There is no doubt that we learn the most about debt from the balance sheet. But it is Train Alliance Sweden’s results that will affect how the balance sheet holds in the future. So when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off the debt with cold hard cash, not accounting gains. So the logical step is to look at the percentage of EBIT that is matched by the actual free cash flow. During the last three years, Train Alliance Sweden saw a total of a large negative free cash flow. While it may be a result of growth expenses, it makes the debt much more risky.
Our sight
We would go so far as to say that Train Alliance Sweden’s conversion of EBIT to free cash flow was disappointing. But it’s at least pretty decent to keep track of your total debt; it’s encouraging. If we look at the balance sheet and take into account all these factors, we believe that the debt makes Train Alliance Sweden shares a bit risky. Some people like that kind of risk, but we are aware of the potential pitfalls, so we probably prefer it to carry less debt. There is no doubt that we learn the most about debt from the balance sheet. But not all investment risk is in the balance sheet – far from it. For this purpose, you should be aware of 3 warning signs we have discovered with Train Alliance Sweden.
If, after all, you are more interested in a fast-growing company with a solid solid balance sheet, check out our list of net growth stocks without delay.
This article by Simply Wall St is general. We provide comments based on historical data and analyst forecasts only using an impartial method 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. We strive to provide you with a long-term focused analysis driven by basic data. Please note that our analysis may not affect the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the aforementioned shares.
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