Warren Buffett famously said, “Volatility is far from synonymous with risk.” So the smart money seems to know that debt, which is usually associated with bankruptcy, is a very important factor when evaluating how risky a company is. Note that Cibus Nordic Real Estate AB (publ) (STO: CIBUS) has a debt on the balance sheet. But the more important question is: how big is the risk of this debt?
What is the risk of debt?
Generally speaking, debt becomes a real problem only when a company cannot easily repay it either by raising capital or by using its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, the more common (but still painful) scenario is that it needs to raise new equity capital at a low cost, leading to constant dilution of shareholders. The most common situation, however, is when a company manages its debt well enough – and in its own interests. The first thing to do when considering how much debt a business is using is to look at its cash and debt together.
How much debt does Cibus Nordic Real Estate have?
You can click the graph below to see the historical figures, but it shows that as of March 2021, Cibus Nordic Real Estate owed € 811.9 million for the year, an increase of € 660.9 million. However, since it has a cash reserve of € 31.5 million, its net debt is lower at around € 780.4 million.
A look at the commitments of Cibus Nordic Real Estate
According to the latest balance sheet, Cibus Nordic Real Estate had liabilities of EUR 14.2 million maturing within 12 months and liabilities of EUR 839.5 million with maturities over 12 months. To settle these obligations, he had cash in the amount of EUR 31.5 million, as well as accounts receivable in the amount of EUR 4.22 million, due to be settled within 12 months. Thus, its liabilities exceed the amount of cash and (short-term) receivables by 818.0 million euros.
This is a huge leverage compared to its market cap of € 849.3 million. If his creditors demand that he strengthen the balance sheet, shareholders are likely to face serious dilution.
We measure a company’s debt burden in relation to its revenues by looking at its net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), and calculating how easily its earnings before interest and taxes (EBIT) cover the interest. expenses (interest coverage). Thus, we consider debt in relation to profit, both with depreciation and without depreciation.
With a net debt to EBITDA ratio of 13.0, it is fair to say that Cibus Nordic Real Estate does have a significant amount of debt. But the good news is that it boasts a fairly comfortable 3.6x interest coverage, which suggests that it can fulfill its obligations responsibly. On the other hand, Cibus Nordic Real Estate increased EBIT by as much as 37% last year. Like the loving hug of the mother of a newborn, this growth builds resilience, enabling the company to manage its debt more effectively. There is no doubt that the most we learn about debt is from the balance sheet. But ultimately, the future profitability of the business will determine whether Cibus Nordic Real Estate can strengthen its balance sheet over time. So if you want to know what the professionals think, you can find this free analyst profit forecast report be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profit just doesn’t cut back. Therefore, we always check how much of this EBIT is translated into free cash flow. Over the past three years, Cibus Nordic Real Estate has recorded free cash flow of 67% of its EBIT, which is roughly normal given that free cash flow does not include interest and taxes. This cold cash means they can reduce their debt whenever they want.
In our opinion, the ratio of Cibus Nordic Real Estate’s net debt to EBITDA and the level of total liabilities definitely have an impact on this. But the good news is that it looks like he can easily increase his EBIT. Looking from all the angles mentioned above, we do feel that Cibus Nordic Real Estate is a somewhat risky investment due to its debt. Not all risks are bad as they can boost stock returns if they pay off, but this debt risk is worth keeping in mind. When analyzing the level of debt, you should obviously start with the balance sheet. However, not all investment risk is in the balance sheet – far from it. We found 4 warning signs with Cibus Nordic Real Estate (minimum 1 potentially serious) and understanding them should be part of your investment process.
After all, it’s often best to focus on companies that don’t have net debt. You can access our special list of such companies (all with experience of profit growth). It’s free.
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