Is Projektengagemang Sweden (STO:PENG B) a risky investment?

Howard Marks put it nicely when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.” When we think about how risky a company is, we always want to look at its use of debt, because debt overload can lead to ruin. We note that Project engagement Sweden AB (publ) (STO: MONEY B) has liabilities on its balance sheet. But the real question is whether this debt makes the company risky.

When is debt a problem?

In general, debt only becomes a real problem when a company cannot easily pay it off, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. A more frequent (but still costly) occurrence, however, is when a company must issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in business, especially capital-intensive businesses. When examining debt levels, we first consider both cash and debt levels together.

Check out our latest analysis for Projektengagemang Sweden

How much debt does Projektengagemang Sweden have?

The image below, which you can click on for more details, shows that Projektengagemang Sweden had a debt of SEK 290.8 million at the end of September 2022, a decrease from SEK 311.9 million in one year. And it doesn’t have a lot of cash, so its net debt is about the same.

How strong is Projektengagemang Sweden’s balance sheet?

We can see from the latest balance sheet that Projektengagemang Sweden had debts of SEK 209.0 million due within one year and debts of SEK 213.5 million due beyond that. On the other hand, it had cash of SEK 2.30 million and receivables worth SEK 227.6 million due within a year. So it has liabilities totaling SEK 192.6 million more than its cash and current receivables, combined.

This deficit is significant in relation to its market capitalization of SEK 306.9 million, so it suggests that shareholders should keep an eye on Projektengagemang Sweden’s use of debt. This suggests that shareholders would be heavily diluted if the company needed to strengthen its balance sheet in a hurry.

We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, tax, depreciation and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest. cost (interest coverage). In this way, we take into account both the absolute quantum of the debt and the interest paid on it.

Project engagement Sweden has a net debt to EBITDA of 4.8, which indicates that a lot of leverage is used to increase returns. On the positive side, its EBIT was 7.7 times its interest expense, and its net debt to EBITDA was quite high at 4.8. It is well worth noting that Projektengagemang Sweden’s EBIT shot up like bamboo after rain and increased by 31% over the last twelve months. It will make it easier to manage your debt. The balance sheet is clearly the area to focus on when analyzing debt. But in the end, the future profitability of the business will determine whether Projektengagemang Sweden can strengthen its balance sheet over time. So if you want to see what the pros think, you might find it this free analyst earnings forecast report to be interesting.

Finally, while the taxman may love accounting profits, lenders only accept cold hard cash. So we clearly have to look at whether that EBIT leads to the corresponding free cash flow. Over the past three years, Projektengagemang Sweden has actually produced more free cash flow than EBIT. That kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our view

Fortunately, Projektengagemang Sweden’s impressive conversion of EBIT to free cash flow means that they have the upper hand on their debt. But we have to admit that we find its net debt to EBITDA to have the opposite effect. All of this makes it look like Projektengagemang Sweden can comfortably handle its current debt levels. On the plus side, this leverage can increase shareholder returns, but the potential downside is greater risk of loss, so it’s worth monitoring the balance sheet. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risk is on the balance sheet – far from it. For example, we have identified 5 warning signs for Project Engagement Sweden which you should be aware of.

If, after all that, you’re more interested in a fast-growing company with a rock-solid balance sheet, check it out our list of net growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only by using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.