Is Mowi (OB:MOWI) a risky investment?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that Mowi ASA (OB:MOWI) uses debt in its business. But does this debt worry shareholders?

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest analysis for Mowi

What is Mowi’s net debt?

The image below, which you can click on for more details, shows that in June 2022, Mowi had a debt of 1.37 billion euros, compared to 1.23 billion euros in one year. On the other hand, he has €133.7 million in cash, resulting in a net debt of around €1.24 billion.

OB:MOWI Debt to Equity September 30, 2022

A look at Mowi’s responsibilities

We can see from the most recent balance sheet that Mowi had liabilities of €1.22 billion due in one year, and liabilities of €1.99 billion due beyond. On the other hand, it has cash of €133.7 million and €706.6 million in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €2.37 billion.

While that might sound like a lot, it’s not that bad since Mowi has a market cap of €6.59 billion, so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

Mowi has a low net debt to EBITDA ratio of just 1.1. And its EBIT covers its interest charges 17.4 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, Mowi has grown its EBIT by 54% over the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But future earnings, more than anything, will determine Mowi’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Mowi has recorded free cash flow of 79% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

The good news is that Mowi’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. And this is only the beginning of good news since its EBIT growth rate is also very encouraging. Looking at the big picture, we think Mowi’s use of debt seems entirely reasonable and that doesn’t worry us. After all, reasonable leverage can increase return on equity. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we found 2 warning signs for Mowi (1 is significant!) which you should be aware of before investing here.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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About Myra R.

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