Saga Furs Oyj (HEL: SAGCV) has a rock solid track record

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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. Like many other companies Saga Furs Oyj (HEL: SAGCV) uses debt. But does this debt concern shareholders?

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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest 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 review for Saga Furs Oyj

What is Saga Furs Oyj’s debt?

As you can see below, Saga Furs Oyj had a debt of 22.2 million euros in April 2021, up from 146.1 million euros the previous year. On the other hand, it has € 463.0 K in cash, leading to a net debt of around € 21.8 M.

HLSE: History of debt on equity of SAGCV July 7, 2021

How strong is Saga Furs Oyj’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Saga Furs Oyj had a liability of 41.1 million euros due within 12 months and a liability of 8.89 million euros due beyond. On the other hand, it had cash of € 463.0 K and € 76.5 M in receivables within one year. He can thus claim € 27.0 million in more liquidity than total Liabilities.

This surplus strongly suggests that Saga Furs Oyj has a rock solid balance sheet (and debt is not of concern). With this in mind, one could postulate that its track record means that the company is able to face certain adversities.

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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Saga Furs Oyj has a debt to EBITDA ratio of 3.3, which signals significant debt, but is still fairly reasonable for most types of business. But her EBIT was about 1,000 times her interest expense, implying that the company wasn’t really paying a high cost to maintain that level of debt. Even if the low cost turns out to be unsustainable, that’s a good sign. Notably, Saga Furs Oyj recorded a loss in EBIT level last year, but improved it to reach a positive EBIT of 3.7 million euros in the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Saga Furs Oyj that will influence the balance sheet in the future. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore important to check to what extent its earnings before interest and taxes (EBIT) are converted into actual free cash flow. Over the past year, Saga Furs Oyj has actually generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the pace drops at a Daft Punk concert.

Our point of view

Saga Furs Oyj’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. Overall, we don’t think Saga Furs Oyj is taking bad risks, as its debt load appears modest. We are therefore not worried about the use of a small leverage on the balance sheet. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Example: we have spotted 2 warning signs for Saga Furs Oyj you must 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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