AddLife (STO: ALIF B) could easily get into more debt
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. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, AddLife AB (released) (STO: ALIF B) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. 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 costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
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What is AddLife’s debt?
As you can see below, at the end of September 2021, AddLife was in debt of 3.80 billion kr, up from 564.0 million kr a year ago. Click on the image for more details. However, since it has a cash reserve of 237.0 million kr, its net debt is less, at around 3.56 billion kr.
How healthy is AddLife’s track record?
We can see from the most recent balance sheet that AddLife had liabilities of SEK 4.75 billion due within one year and liabilities of SEK 1.36 billion due beyond. In compensation for these obligations, he had cash of SEK 237.0 million as well as receivables valued at SEK 1.14 billion due within 12 months. Its liabilities therefore total 4.74 billion crowns more than the combination of its cash and short-term receivables.
Considering that AddLife has a market capitalization of SEK 39.4 billion, it’s hard to believe that these liabilities pose a significant threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
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). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt compared to EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
AddLife’s net debt is 2.6 times its EBITDA, which represents significant leverage but still reasonable. However, its interest coverage of 21.4 is very high, suggesting that interest charges on debt are currently quite low. Notably, AddLife’s EBIT was higher than Elon Musk’s, gaining 142% from last year. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of AddLife that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, AddLife has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.
Our point of view
AddLife’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But, on a darker note, we’re a little concerned about its net debt to EBITDA. Considering this range of factors, it seems to us that AddLife 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. However, not all investment risks lie on the balance sheet – far from it. For example – AddLife has 3 warning signs we think you should be aware.
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.
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