Is Nolato (STO:NOLA B) a risky investment?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Nolato AB (publisher) (STO:NOLA B) has debt on its balance sheet. But should shareholders worry about its use of debt?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.
See our latest review for Nolato
What is Nolato’s debt?
The image below, which you can click on for more details, shows that Nolato had a debt of 1.50 billion kr at the end of December 2021, a reduction from 1.79 billion kr year-on-year. However, as it has a cash reserve of 1.45 billion kr, its net debt is less at around 51.0 million kr.
How healthy is Nolato’s balance sheet?
The latest balance sheet data shows that Nolato had liabilities of 3.11 billion kr falling due within one year, and liabilities of 2.18 billion kr falling due thereafter. In return, it had 1.45 billion kr in cash and 2.05 billion kr in debt due within 12 months. It therefore has liabilities totaling kr 1.79 billion more than its cash and short-term receivables, combined.
Given that publicly traded Nolato shares are worth a total of 18.5 billion kr, it seems unlikely that this level of liability is a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. But anyway, Nolato has virtually no net debt, so it’s fair to say that he doesn’t have a lot of debt!
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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Nolato has very little debt (net of cash) and has a debt/EBITDA ratio of 0.03 and an EBIT of 216 times interest expense. Indeed, relative to its earnings, its leverage seems light as a feather. Another good thing is that Nolato has grown its EBIT by 18% over the past year, further increasing its ability to manage debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Nolato 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.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Nolato has produced strong free cash flow equivalent to 62% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
Fortunately, Nolato’s impressive interest coverage means he has the upper hand on his debt. And the good news doesn’t stop there, since its net debt to EBITDA also confirms this impression! Zooming out, Nolato seems to be using debt quite sensibly; and that gets the green light from us. After all, reasonable leverage can increase return on equity. 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 2 warning signs for Nolato of which you should be aware.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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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.