New Wave Group (STO:NEWA B) has a rock-solid balance sheet
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, New Wave Group AB (published) (STO:NEWA B) is in debt. But does this debt worry shareholders?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. 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. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
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What is New Wave Group’s net debt?
As you can see below, New Wave Group had 1.66 billion kr in debt, as of June 2022, which is about the same as the previous year. You can click on the graph for more details. However, he has 305.5 million kr in cash to offset this, resulting in a net debt of around 1.36 billion kr.
How strong is New Wave Group’s balance sheet?
Zooming in on the latest balance sheet data, we can see that New Wave Group had liabilities of 1.88 billion kr due within 12 months and liabilities of 1.62 billion kr due beyond. In return, he had 305.5 million kr in cash and 1.46 billion kr in debt due within 12 months. It therefore has liabilities totaling kr 1.73 billion more than its cash and short-term receivables, combined.
Of course, New Wave Group has a market capitalization of 10.4 billion kr, so these liabilities are probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.
We measure a company’s leverage against 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 charge (interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
New Wave Group’s net debt represents only 1.0 times its EBITDA. And its EBIT covers its interest charges 30.7 times more. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, New Wave Group has increased its EBIT by 65% over the last twelve months, and this growth will make it easier to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine New Wave Group’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cold hard cash, not with book profits. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, New Wave Group has recorded free cash flow representing 98% of its EBIT, which is higher than what we would normally expect. This puts him in a very strong position to pay off the debt.
Our point of view
Fortunately, New Wave Group’s impressive interest coverage means it has the upper hand on its debt. And this is only the beginning of good news since its conversion of EBIT into free cash flow is also very pleasing. Given this set of factors, it seems to us that New Wave Group is quite cautious with its debt, and the risks seem well controlled. The balance sheet therefore seems rather healthy to us. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 1 warning sign for New Wave Group of which you should be aware.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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