ABO Wind (HMSE: AB9) has a fairly healthy track record

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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that ABO Wind SA (HMSE: AB9) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest analysis for ABO Wind

What is ABO Wind’s net debt?

As you can see below, ABO Wind had € 82.4 million in debt in June 2021, up from € 87.1 million the year before. On the other hand, it has 52.2 million euros in cash, leading to a net debt of around 30.2 million euros.

HMSE: AB9 History of debt to equity September 30, 2021

A look at ABO Wind’s responsibilities

According to the latest published balance sheet, ABO Wind had liabilities of 30.3 million euros within 12 months and liabilities of 87.8 million euros due beyond 12 months. In compensation for these obligations, he had cash of € 52.2 million as well as receivables valued at € 88.0 million within 12 months. So he actually has 22.1 million euros Following liquid assets as total liabilities.

This surplus suggests that ABO Wind has a prudent balance sheet and could probably eliminate its debt without too much difficulty.

We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). 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).

ABO Wind’s net debt is only 0.84 times its EBITDA. And its EBIT easily covers its interest costs, being 26.4 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, ABO Wind has increased its EBIT by 37% over the past twelve months, and this growth will make it easier to process its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ABO Wind’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

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 check whether this EBIT generates a corresponding free cash flow. Over the past three years, ABO Wind has recorded a free cash flow of 23% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.

Our point of view

The good news is that ABO Wind’s demonstrated ability to cover interest costs with EBIT delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a little concerned about its conversion from EBIT to free cash flow. When zoomed out, ABO Wind appears to be using the debt fairly sensibly; and that gets the nod from us. While debt comes with risk, when used wisely, it can also generate a higher return on equity. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 4 warning signs with ABO Wind (at least 1 which is significant), and understanding them should be part of your investment process.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

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 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 documents. Simply Wall St has no position in any of the stocks mentioned.

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