Bodyflight Sweden (NGM: BODY) The use of debt can be considered risky
David Iben put it well when he said: ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. ‘ It is only natural to take a company’s balance sheet into account when examining how risky it is, since debt is often involved when a company collapses. We can see it Bodyflight Sweden AB (publ) (NGM: BODY) uses debt in its operations. But the real question is whether this debt makes the company risky.
When is debt a problem?
Debt is a tool to help companies grow, but if a company is unable to pay off its lenders, then it is at their mercy. Part of capitalism is the process of “creative destruction” in which failed companies are mercilessly liquidated by their bankers. A more common (but still expensive) situation, however, is that a company must dilute shareholders to a cheap share price simply to get the debt under control. With that said, the most common situation is that a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a company is using is to look at their money and debt together.
Check out our latest analysis for Bodyflight Sweden
What is Bodyflight Sweden’s fault?
You can click on the graphic below for the historical figures, but it shows that Bodyflight Sweden had SEK 22.2 million in debt in September 2021, a decrease from SEK 26.2 million a year earlier. But it also had SEK 2.16 million in cash, so its net debt is SEK 20.1 million.
A look at Bodyflight Sweden’s shoulders
According to the most recently reported balance sheet, Bodyflight Sweden had liabilities of SEK 19.0 million due within 12 months and liabilities of SEK 31.0 million due after 12 months. Against these commitments, it had cash of SEK 2.16 million and receivables valued at SEK 660.0 thousand fell due within 12 months. So its liabilities amount to SEK 47.2 million more than the combination of its cash and current receivables.
The lack here weighs heavily on the company itself SEK 30.8 million, as if a child was fighting under the weight of a huge backpack full of books, his sports equipment and a trumpet. So we would look closely at its balance sheet, no doubt. In the end, Bodyflight Sweden would probably need a substantial recapitalization if its creditors were to demand repayment.
We use two main figures to inform ourselves about debt levels in relation to the result. The first is net debt divided by profit before interest, tax, depreciation and amortization (EBITDA), while the second is how many times its profit before interest and tax (EBIT) covers its interest expenses (or its interest coverage, for short). . The advantage of this approach is that we take into account both the absolute quantity of the debt (with net debt to EBITDA) and the actual interest costs associated with that debt (with its interest coverage ratio).
While Bodyflight Sweden’s debt / EBITDA ratio (3.5) indicates that they use some debt, its interest coverage is very weak, 1.8, which indicates a high leverage effect. So shareholders should probably be aware that interest costs have really affected operations recently. The silver lining is that Bodyflight Sweden increased its EBIT by 151% last year, which provides nourishment as the idealism of young people. If it can continue to go that way, it will be able to get rid of its debt relatively easily. The balance sheet is clearly the area to focus on when analyzing debt. But it is Bodyflight Sweden’s results that will affect how the balance sheet holds up in the future. So if you’re keen to discover more about its revenue, it may be worth checking out this graph of its long-term earnings trend.
Finally, a company can only pay off debts with cold hard cash, not with profit. So we always control how much of the EBIT is translated into free cash flow. Over the past three years, Bodyflight Sweden has burned a lot of money. While it may be a result of growth expenses, it makes the debt much more risky.
Our view
To be honest, both Bodyflight Sweden’s level of total debt and its track record of converting EBIT to free cash flow make us quite uncomfortable with its debt levels. But it’s at least pretty decent at increasing its EBIT; it’s encouraging. All in all, it seems to us that Bodyflight Sweden’s balance sheet is really a real risk for the business. For this reason, we are quite cautious about the stock, and we think shareholders should keep an eye on its liquidity. The balance sheet is clearly the area to focus on when analyzing debt. But in the end, every business can contain risks that are off the balance sheet. For example, we have discovered 4 warning signs for Bodyflight Sweden (2 makes us uncomfortable!) Which you should be aware of before investing here.
Of course, if you are the type of investor who prefers to buy debt-free stocks, do not hesitate to discover our exclusive list of net 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 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 any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the shares mentioned.