We think Jeudan (CPH: JDAN) is taking risks with its debt
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We can see that Thursday A / S (CPH: JDAN) uses debt in his business. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. 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, 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.
See our latest review for Jeudan
How much debt does Jeudan have?
As you can see below, Jeudan was in debt of 18.0 billion kr, as of September 2021, which is roughly the same as the year before. You can click on the graph for more details. Net debt is about the same because it doesn’t have a lot of cash.
How strong is Jeudan’s balance sheet?
The latest balance sheet data shows that Jeudan had debt of Kroner 1.30 billion due within one year, and KKr 19.3 billion debt maturing thereafter. In return, he had 17.8 million kr in cash and 267.2 million kr in receivables due within 12 months. Its liabilities therefore total SEK 20.3 billion more than the combination of its cash and short-term receivables.
When you consider that this shortfall exceeds the market capitalization of the company 15.0 billion crowns, you may well be inclined to carefully review the balance sheet. Hypothetically, an extremely high dilution would be necessary if the company were forced to repay its debts by raising capital at the current share price.
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). Thus, we consider debt versus earnings with and without amortization expenses.
Jeudan’s net debt to EBITDA ratio is 20.9, which suggests rather high debt levels, but its 8.0 times interest coverage suggests debt servicing is easy. Overall, we would say it seems likely that the company is carrying some pretty heavy debt. In particular, Jeudan’s EBIT has been fairly stable over the past year. Ideally, he can reduce his debt load by starting profit growth. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Jeudan will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Jeudan has recorded free cash flow representing a total of 85% of its EBIT, which is higher than what we normally expected. This puts him in a very strong position to pay off the debt.
Our point of view
The net debt to EBITDA and the level of Jeudan’s total liabilities certainly weighs on this, in our opinion. But its conversion from EBIT to free cash flow tells a very different story and suggests some resilience. Taking the above factors together, we believe that Jeudan’s debt presents certain risks to the business. While this debt may increase returns, we believe the company now has sufficient leverage. 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. We have identified 2 warning signs with Jeudan (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.
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.
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 the mentioned stocks.
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.