Here’s why Davide Campari-Milano (BIT: CPR) can responsibly manage his debt

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Davide Campari-Milano SA (BIT: CPR) uses debt in his 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 business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest review for Davide Campari-Milano

How much debt does Davide Campari-Milano have?

The image below, which you can click for more details, shows that Davide Campari-Milano had a debt of 1.65 billion euros at the end of June 2021, a reduction of 1.78 billion euros over a year. However, he also had € 669.4 million in cash, so his net debt is € 984.3 million.

BIT: Historical CPR of Debt to Equity October 13, 2021

How strong is Davide Campari-Milano’s balance sheet?

The latest balance sheet data shows Davide Campari-Milano had debts of € 870.6 million due within a year, and debts of € 1.85 billion maturing thereafter. On the other hand, it had cash of € 669.4 million and € 389.6 million in receivables within one year. It therefore has total liabilities of 1.67 billion euros more than its combined cash and short-term receivables.

Considering Davide Campari-Milano has a whopping market cap of € 14.1 billion, it’s hard to believe that these liabilities pose a threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization charges.

We would say that Davide Campari-Milano’s moderate net debt / EBITDA ratio (being 2.2) indicates prudence in terms of debt. And its strong coverage interest of 19.7 times, makes us even more comfortable. If Davide Campari-Milano can continue to increase his EBIT at the rate of 14% last year compared to last year, then he will find his debt more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But in the end, the future profitability of the company will decide whether Davide Campari-Milano can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years Davide Campari-Milano has recorded free cash flow corresponding to 60% of its EBIT, which is close to normal, given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.

Our point of view

Fortunately, Davide Campari-Milano’s impressive interest coverage means he has the upper hand on his debt. And we also thought its EBIT growth rate was positive. When we consider the range of factors above, it seems Davide Campari-Milano is being pretty reasonable with his use of debt. While this carries some risk, it can also improve returns for shareholders. 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 off the balance sheet. We have identified 1 warning sign with Davide Campari-Milano, and understanding them should be part of your investment process.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.

About Myra R.

Myra R.

Check Also

Don’t rush to buy LifeWorks Inc. (TSE: LWRK) just because it’s going ex-dividend

LifeWorks Inc. The stock (TSE: LWRK) is set to trade off-dividend in four days. The …

Leave a Reply

Your email address will not be published. Required fields are marked *