We think Systemair (STO:SYSR) can stay on top of its debt

0

Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Systemair AB (publisher) (STO:SYSR) is in debt. But the more important question is: what risk does this debt create?

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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. 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 step when considering a company’s debt levels is to consider its cash and debt together.

Discover our latest analysis for Systemair

What is Systemair’s debt?

The image below, which you can click on for more details, shows that in January 2022, Systemair had a debt of 2.10 billion kr, compared to 1.85 billion kr in one year. On the other hand, he has 327.7 million kr in cash, resulting in a net debt of around 1.77 billion kr.

OM:SYSR Debt to Equity History April 19, 2022

How strong is Systemair’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Systemair had liabilities of 2.81 billion kr due within 12 months and liabilities of 1.34 billion kr due beyond. As compensation for these obligations, it had liquid assets of 327.7 million kr as well as receivables valued at 2.01 billion kr and payable within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of kr 1.81 billion.

Of course, Systemair has a market capitalization of 13.9 billion kr, so these liabilities are probably manageable. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.

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 depreciation and amortization charges.

We would say that Systemair’s moderate net debt/EBITDA ratio (1.8) indicates prudence in terms of leverage. And its towering EBIT of 31.3 times its interest expense means that the debt burden is as light as a peacock feather. It should also be noted that Systemair has increased its EBIT by a very respectable 24% over the past year, improving its ability to repay its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Systemair can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Systemair has recorded free cash flow representing 71% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

The good news is that Systemair’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. And this is only the beginning of good news since its EBIT growth rate is also very encouraging. Zooming out, Systemair appears to be using debt quite sensibly; and that gets the green light from us. Although debt carries risks, when used wisely, it can also generate a higher return on equity. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that Systemair displays 2 warning signs in our investment analysis you should know…

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

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.

Share.

Comments are closed.