Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Gyldendal A/S (CPH:GYLD B) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Gyldendal's Net Debt?
As you can see below, Gyldendal had ø26.0m of debt at December 2018, down from ø38.2m a year prior. But it also has ø55.5m in cash to offset that, meaning it has ø29.5m net cash.
A Look At Gyldendal's Liabilities
We can see from the most recent balance sheet that Gyldendal had liabilities of ø282.5m falling due within a year, and liabilities of ø19.3m due beyond that. Offsetting this, it had ø55.5m in cash and ø226.4m in receivables that were due within 12 months. So it has liabilities totalling ø19.9m more than its cash and near-term receivables, combined.
Since publicly traded Gyldendal shares are worth a total of ø903.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Gyldendal boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Gyldendal if management cannot prevent a repeat of the 47% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is Gyldendal's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Gyldendal has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Gyldendal recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
We could understand if investors are concerned about Gyldendal's liabilities, but we can be reassured by the fact it has has net cash of ø29m. So while Gyldendal does not have a great balance sheet, it's certainly not too bad. Given Gyldendal has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.