Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that TKH Group SA (AMS: TWEKA) uses debt in its business. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest analysis for TKH Group
What is the net debt of the TKH group?
You can click on the graph below for historical figures, but it shows that TKH Group had € 432.7 million in debt in June 2021, up from € 524.6 million a year earlier. However, it has € 82.6 million in cash offsetting this, which leads to net debt of around € 350.1 million.
A look at the responsibilities of TKH Group
The most recent balance sheet shows that TKH Group had debts of 514.6 million euros due within one year and debts of 446.6 million euros due beyond. On the other hand, it had cash of € 82.6 million and € 326.6 million in receivables within one year. It therefore has total liabilities of € 552.0 million more than its combined cash and short-term receivables.
TKH Group has a market capitalization of 2.09 billion euros, so it could most likely raise cash to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
TKH Group’s net debt to EBITDA ratio of around 2.2 suggests moderate use of debt. And its imposing EBIT of 12.2 times its interest costs, means the debt load is as light as a peacock feather. It is important to note that TKH Group’s EBIT has remained essentially stable over the past twelve months. Ideally, he can reduce his debt load by starting profit growth. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine TKH Group’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Fortunately for all shareholders, TKH Group has actually generated more free cash flow than EBIT over the past three years. There is nothing better than cash flow to stay in the good graces of your lenders.
Our point of view
Fortunately, TKH Group’s impressive interest coverage means it has the upper hand over its debt. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! When we consider the range of factors above, it seems that TKH Group is being fairly reasonable with its use of debt. This means that they are taking a bit more risk, in the hope of increasing shareholder returns. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for the TKH group that you need to be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.