We think Bodyflight Sweden (NGM:BODY) is taking some risk with its debt
Some say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that “Volatility is far from synonymous with risk.” So it may be obvious that you need to consider debt, when you think about how risky a particular stock is, because too much debt can bring down a company. important, Bodyflight Sweden AB (publ) (NGM: BODY) has debts. But is this debt a concern for shareholders?
Why do debts entail risks?
Debt helps a company until the company has trouble paying it off, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. A more common (but still expensive) situation, however, is that a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, many companies use debt to finance growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Bodyflight Sweden
How much debt does Bodyflight Sweden have?
You can click on the graphic below for the historical numbers, but it shows that Bodyflight Sweden had SEK 16.3 million in debt in September 2022, down from SEK 22.2 million a year earlier. But it also had SEK 561.0 thousand in cash, so its net debt is SEK 15.7 million.
A look at Bodyflight Sweden’s debts
The latest balance sheet shows that Bodyflight Sweden had debts of SEK 18.6 million due within a year and debts of SEK 25.6 million due after that. Against these commitments, it had cash of SEK 561.0 thousand and receivables valued at SEK 735.0 thousand due within 12 months. So its liabilities outweigh the sum of its cash and (closer) receivables by SEK 42.9 million.
The shortfall here weighs heavily on the company itself SEK 26.7 million, as if a child struggled under the weight of a huge backpack full of books, his sports equipment and a trumpet. So we definitely think shareholders need to watch this closely. After all, Bodyflight Sweden would likely require a substantial recapitalization if it had to pay its creditors today.
We use two key figures to inform us of debt levels in relation to earnings. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how many times its earnings before interest and taxes (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 quantum of debt (using net debt to EBITDA) and the actual interest costs associated with that debt (using its interest coverage ratio).
Bodyflight Sweden’s debt is 2.6 times its EBITDA and its EBIT covers interest costs 2.6 times over. This suggests that although debt levels are significant, we would stop short of calling them problematic. It is also relevant that Bodyflight Sweden has increased its EBIT by a very respectable 23% over the past year and thus improved its ability to pay off debts. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at guilt in total isolation; because Bodyflight Sweden will need income to pay that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long-term earnings development.
Finally, while the taxman may love accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT translates into free cash flow. Looking at the last three years, Bodyflight Sweden recorded a free cash flow of 44% of its EBIT, which is weaker than we had expected. It’s not good when it comes to paying down debt.
Our view
We would go so far as to say that Bodyflight Sweden’s overall debt level was disappointing. But on the bright side, its EBIT growth is a good sign and makes us more optimistic. Overall, we think it’s fair to say that Bodyflight Sweden has enough debt that there are some real risks around the balance sheet. If all goes well that can pay off but the downside of this debt is a greater risk of permanent losses. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain off-balance sheet risks. We have identified 3 warning signs with Bodyflight Sweden (at least 2 that should not be ignored) and understanding them should be part of your investment process.
If you’re interested in investing in companies that can grow profits without the burden of debt, check this out free list of growing companies that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only by using an unbiased methodology 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 fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.