Here’s why Coloplast (CPH: COLO B) can responsibly manage debt

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Warren Buffett said: “Volatility is far from synonymous with risk”. 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 Coloplast A / S (CPH: COLO B) uses debt in his business. But the most important question is: what risk does this debt create?

Why Does Debt Bring Risk?

Debts 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. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. 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 Coloplast

What is Coloplast’s debt?

You can click on the graph below for historical figures, but it shows that as of June 2021, Coloplast had debt of Kroner 3.68 billion, an increase from Kroner 2.52 billion, on a year. On the other hand, he has 675.0 million crowns in cash, resulting in a net debt of around 3.01 billion crowns.

CPSE: COLO B History of debt to equity October 2, 2021

Is the balance sheet of Coloplast healthy?

The latest balance sheet data shows that Coloplast had KKr 7.12 billion in debt due within one year, and KKr 1.42 billion in debt due thereafter. In return, he had 675.0 million kr in cash and 3.61 billion kr in receivables due within 12 months. Its liabilities therefore total 4.25 billion crowns more than the combination of its cash and short-term receivables.

This state of affairs indicates that Coloplast’s balance sheet looks quite strong, as its total liabilities roughly equal its cash. So while it’s hard to imagine the kr.212.5ba company struggling to find money, we still think it’s worth watching its balance sheet. Having practically no net debt, Coloplast is indeed very little in debt.

We measure a company’s debt load relative to its earning power 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).

Coloplast has a low net debt to EBITDA ratio of just 0.45. And its EBIT easily covers its interest costs, being 324 times higher. So we’re pretty relaxed about its ultra-conservative use of debt. Fortunately, Coloplast has increased its EBIT by 5.3% over the past year, which makes this debt load even more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Coloplast’s ability to maintain a healthy balance sheet in the future. 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, Coloplast has recorded free cash flow corresponding to 60% 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

Coloplast’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And that’s just the start of the good news as its net debt to EBITDA is also very encouraging. It should also be noted that Coloplast is part of the medical equipment industry, which is often seen as quite defensive. Zooming out Coloplast seems to be using the debt in a very reasonable way; and that gets the nod from us. While debt comes with risk, when used wisely, it can also generate a higher return on equity. 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. Concrete example: we have spotted 1 warning sign for Coloplast you must be aware.

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-flow-growing stocks today.

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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