Here’s why K-Fast Holding (STO:KFAST B) can manage its debt responsibly
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that K-Fast Holding AB (published) (STO:KFAST B) uses debt in its business. But should shareholders worry about its use of debt?
When is debt dangerous?
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. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for K-Fast Holding
What is K-Fast Holding’s debt?
As you can see below, at the end of December 2021, K-Fast Holding had 5.94 billion kr in debt, compared to 3.86 billion kr a year ago. Click on the image for more details. Net debt is about the same, since she doesn’t have a lot of cash.
How healthy is K-Fast Holding’s balance sheet?
According to the latest published balance sheet, K-Fast Holding had liabilities of kr 1.44 billion maturing within 12 months and liabilities of kr 5.81 billion maturing beyond 12 months. In return, he had 94.0 million kr in cash and 312.9 million kr in receivables due within 12 months. It therefore has liabilities totaling kr 6.84 billion more than its cash and short-term receivables, combined.
While that may sound like a lot, it’s not that bad since K-Fast Holding has a market capitalization of 14.2 billion kr, and so it could probably strengthen its balance sheet by raising capital if needed. But it is clear that it must be carefully examined whether he can manage his debt without dilution.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
K-Fast Holding shareholders face the double whammy of a high net debt to EBITDA ratio (25.9) and quite low interest coverage, as EBIT is only 2.4x interest charges. The debt burden here is considerable. The good news is that K-Fast Holding has grown its EBIT by 69% smoothly over the past twelve months. Like a mother’s loving embrace of a newborn, this kind of growth builds resilience, putting the company in a stronger position to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether K-Fast Holding can strengthen its balance sheet over time. 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. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, K-Fast Holding has recorded free cash flow of 61% 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
K-Fast Holding’s net debt to EBITDA was a real negative in this analysis, although the other factors we considered were considerably better. In particular, we are blown away by its EBIT growth rate. Looking at all this data, we feel a bit cautious about K-Fast Holding’s debt levels. While debt has its upside in higher potential returns, we think shareholders should certainly consider how debt levels might make the stock more risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 5 warning signs for K-Fast Holding you should be aware, and 2 of them are a bit of a concern.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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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.