Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Mostly, Thule Group AB (released) (STO: THULE) is in debt. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debt 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. 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, many companies use debt to finance their growth without negative consequences. 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 Thule Group
What is the debt of the Thule group?
The image below, which you can click for more details, shows that Thule Group had debt of SEK 944.0 million at the end of March 2021, a reduction from SEK 3.15 billion on a year. However, it has 708.0 million kr in cash offsetting this, which leads to a net debt of around 236.0 million kr.
A look at the responsibilities of the Thule group
We can see from the most recent balance sheet that Thule Group had liabilities of NOK 2.00 billion due within one year, and liabilities of SEK 1.64 billion due beyond. On the other hand, he had cash of 708.0 million crowns and receivables worth 1.61 billion crowns within a year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 1.31 billion kroner.
Given that Thule Group has a market cap of kr41.1b, it is hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. With virtually no net debt, Thule Group has very low debt.
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 profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Thule Group has a low net debt to EBITDA ratio of just 0.12. And its EBIT easily covers its interest costs, being 50.2 times higher. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, Thule Group has increased its EBIT by 58% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Thule Group’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Thule Group has recorded free cash flow of 71% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
Fortunately, the Thule Group’s impressive interest coverage means it has the upper hand on its debt. And that’s just the start of the good news as its EBIT growth rate is also very encouraging. We believe that Thule Group owes no more to its lenders than the birds are to bird watchers. In our opinion, he has a healthy and happy track record. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with Thule Group and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth stocks today.
If you decide to trade with Thule Group, use the cheapest platform * which is ranked # 1 overall by Barron’s, Interactive brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares 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 material. Simply Wall St has no position in the mentioned stocks.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
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.