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 Troax Group AB (released) (STO: TROAX) uses debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest analysis for Troax Group
What is the debt of Troax Group?
You can click on the graph below for historical figures, but it shows that Troax Group had € 30.8 million in debt in June 2021, up from € 89.9 million a year earlier. However, because it has a cash reserve of € 22.8 million, its net debt is lower, at around € 8.00 million.
How healthy is Troax Group’s balance sheet?
According to the latest published balance sheet, Troax Group had liabilities of 112.2 million euros within 12 months and liabilities of 30.8 million euros due beyond 12 months. In compensation for these commitments, he had cash of € 22.8 million as well as receivables valued at € 58.3 million within 12 months. Its liabilities thus exceed the sum of its cash and its receivables (short term) by € 61.9 million.
Given that the listed Troax Group shares are worth a total of 2.06 billion euros, it seems unlikely that this level of liabilities is a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. Having practically no net debt, Troax Group is indeed very little in 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).
Troax Group’s net debt is only 0.16 times its EBITDA. And its EBIT covers its interest costs 60.5 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, Troax Group has increased its EBIT by 49% 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 ultimately, the company’s future profitability will decide whether Troax Group can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Troax Group has generated strong free cash flow equivalent to 52% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
The good news is that Troax Group’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. And that’s just the start of the good news as its EBIT growth rate is also very encouraging. When zoomed out, Troax Group appears to be using debt quite reasonably; and that gets the nod from us. After all, reasonable leverage can increase returns on equity. Over time, stock prices tend to follow earnings per share, so if you are interested in Troax Group you may want to click here to view an interactive graph of its historical earnings per share.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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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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