We think TradeDoubler (STO:TRAD) can stay on top of its debt

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies TradeDoubler AB (publisher) (STO:TRAD) uses debt. But does this debt worry shareholders?

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. 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, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest analysis for TradeDoubler

What is TradeDoubler Net Debt?

You can click on the graph below for historical figures, but it shows that TradeDoubler had debt of 93.4 million kr in March 2022, compared to 121.0 million kr a year before. However, as he has a cash reserve of 87.6 million kr, his net debt is lower at around 5.83 million kr.

OM:TRAD Debt to Equity History June 12, 2022

How healthy is TradeDoubler’s balance sheet?

According to the latest published balance sheet, TradeDoubler had liabilities of kr 477.7 million due within 12 months and liabilities of kr 109.8 million due beyond 12 months. On the other hand, it had a cash position of 87.6 million kr and 337.0 million kr of receivables due within one year. It therefore has liabilities totaling kr 162.8 million more than its cash and short-term receivables, combined.

This is a mountain of leverage compared to its market capitalization of 266.3 million kr. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Looking at its net debt to EBITDA of 0.16 and its interest coverage of 5.8 times, it seems to us that TradeDoubler is probably using debt quite sensibly. We therefore recommend that you closely monitor the impact of financing costs on the company. It should be noted that TradeDoubler’s EBIT has jumped like bamboo after rain, gaining 63% over the last twelve months. This will make it easier to manage your debt. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since TradeDoubler will need income to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Fortunately for all shareholders, TradeDoubler has actually produced more free cash flow than EBIT over the past three years. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

The good news is that TradeDoubler’s demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a bit concerned about his total passive level. Overall, we think TradeDoubler’s use of debt seems quite reasonable and we’re not worried about that. After all, reasonable leverage can increase return on equity. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To this end, you should be aware of the 3 warning signs we spotted with TradeDoubler.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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.

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