David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ 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 notice that XANO Industri AB (publisher) (STO: XANO B) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. 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.
Check out our latest analysis for XANO Industri
What is the debt of XANO Industri?
You can click on the graph below for historical figures, but it shows that in September 2021, XANO Industri had a debt of 1.15 billion kr, an increase from 695.0 million kr, on a year. On the other hand, it has a cash position of 351.0 million kr, resulting in a net debt of around 796.0 million kr.
How strong is XANO Industri’s balance sheet?
Zooming in on the latest balance sheet data, we can see that XANO Industri had a liability of SEK 861.0 million due within 12 months and liabilities of SEK 1.14 billion beyond. In return, he had 351.0 million kr in cash and 745.0 million kr in receivables due within 12 months. Its liabilities therefore total SEK 905.0 million more than the combination of its cash and short-term receivables.
Considering that XANO Industri has a market capitalization of SEK 9.16 billion, it is hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we look at debt versus earnings with and without amortization expenses.
XANO Industri’s net debt to EBITDA ratio of around 1.6 suggests only a moderate use of debt. And its imposing EBIT of 31.3 times its interest costs, means the debt load is as light as a peacock feather. In addition, XANO Industri has increased its EBIT by 85% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is the results of XANO Industri that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Over the past three years, XANO Industri has recorded free cash flow representing a total of 82% of its EBIT, which is higher than what we normally expected. This positions it well to repay debt if it is desirable.
Our point of view
XANO Industri’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And this is only the beginning of good news as its conversion from EBIT to free cash flow is also very encouraging. Considering this range of factors, it seems to us that XANO Industri is quite cautious with its debt, and the risks seem well under control. We are therefore not worried about the use of a small leverage on the balance sheet. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 1 warning sign for XANO Industri that you need to be aware of.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
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.