Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Bergs Timber AB (publ) (STO:BRG B) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Bergs Timber
What Is Bergs Timber's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Bergs Timber had debt of kr847.0m, up from kr593.8m in one year. However, it also had kr73.0m in cash, and so its net debt is kr774.0m.
How Strong Is Bergs Timber's Balance Sheet?
The latest balance sheet data shows that Bergs Timber had liabilities of kr607.0m due within a year, and liabilities of kr711.0m falling due after that. On the other hand, it had cash of kr73.0m and kr542.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr703.0m.
This deficit is considerable relative to its market capitalization of kr913.6m, so it does suggest shareholders should keep an eye on Bergs Timber's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).