Some say that volatility, not debt, is the best way to think about risk as an investor, but Warren Buffett once said, “Volatility is far from synonymous with risk.” So it seems that the smart money knows that debt – which is usually associated with bankruptcies – is a very important factor when assessing the risk of a company. We can see that LINK Mobility Group Holding ASA (OB:LINK) does indeed use debt in its business. But should shareholders be concerned about its use of debt?

When is debt a problem?

Debt is a tool to help businesses grow, but if a company is unable to repay its debts to lenders, it is at their mercy. In a worst-case scenario, a company can go bankrupt if it cannot pay its creditors. More common (but still costly), however, is that a company must issue shares at bargain prices, permanently diluting shareholder ownership, just to shore up its balance sheet. By replacing dilution, however, debt can be an extremely good tool for companies that need capital to invest in growth with high returns. The first step in looking at a company’s debt levels is to look at its cash and debt together.

Check out our latest analysis for LINK Mobility Group Holding

How much debt does LINK Mobility Group Holding have?

The chart below, which you can click on for more details, shows that LINK Mobility Group Holding had 4.33 billion krone in debt in March 2024; roughly the same as the year before. However, since it has a cash reserve of 3.36 billion krone, its net debt is lower, at about 965.6 million krone.

A look at the liabilities of LINK Mobility Group Holding

Taking a closer look at the most recent balance sheet data, we can see that LINK Mobility Group Holding has NOK 1.73bn in liabilities due within 12 months and NOK 4.60bn in accounts payable due beyond that. This compares with NOK 3.36bn in cash and NOK 1.45bn in receivables due within 12 months. So total liabilities amount to NOK 1.52bn more than the sum of cash and short-term receivables.

While this may seem like a lot, it is not so bad as LINK Mobility Group Holding has a market capitalization of 6.32 billion krone and could therefore probably strengthen its balance sheet through a capital increase if it needed to. But it is clear that we should definitely take a close look at whether it can handle its debt without dilution.

We measure a company’s debt load relative to its earnings power by dividing its net debt by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest expenses (interest cover). So we look at debt relative to earnings both with and without depreciation and amortization expenses.

While LINK Mobility Group Holding has a fairly reasonable net debt to EBITDA ratio of 1.9, its interest coverage seems weak at 1.5. The main reason for this is its high depreciation and amortization. While companies often boast that these costs are not incurred in cash, most of these companies therefore require ongoing capital expenditure (which is not expensed). In any case, it is safe to say that the company has a significant amount of debt. Importantly, LINK Mobility Group Holding grew its EBIT by 69% over the last twelve months, and this growth will make it easier for it to manage its debt. When analyzing debt levels, the balance sheet is the obvious place to start. But it is above all future earnings that will determine whether LINK Mobility Group Holding can maintain a healthy balance sheet going forward, so if you want to know what the professionals think, you might find this free report on analyst earnings forecasts interesting.

After all, a company needs free cash flow to pay off debt; retained earnings simply aren’t enough to do that. So we really need to check whether that EBIT translates into a corresponding free cash flow. In fact, over the last three years, LINK Mobility Group Holding generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our view

The good news is that LINK Mobility Group Holding’s proven ability to convert EBIT to free cash flow pleases us as much as a fluffy puppy pleases a toddler. However, the naked truth is that we are concerned about its interest coverage. Taking all this data into account, it seems to us that LINK Mobility Group Holding has a fairly sensible approach to debt. While this does introduce some risk, it can also increase shareholder returns. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risk lies on the balance sheet – quite the opposite. To that end, you should be aware of the following points: 1 warning sign we discovered it at LINK Mobility Group Holding.

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

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.