Is Rubis (EPA:RUI) a risky investment?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Ruby (EPA:RUI) has debt on its balance sheet. But the more important question is: what risk does this debt create?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company 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, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.

Discover our latest analysis for Rubis

What is Ruby’s debt?

The image below, which you can click on for more details, shows that in June 2022, Rubis had a debt of 2.21 billion euros, compared to 1.33 billion euros in one year. However, he has €774.4 million in cash that offsets this, resulting in a net debt of around €1.44 billion.

ENXTPA: RUI Debt to Equity September 28, 2022

A look at Rubis’ liabilities

We can see on the most recent balance sheet that Rubis had liabilities of 1.93 billion euros within one year and liabilities of 2.05 billion euros beyond. On the other hand, it has cash of €774.4 million and €893.6 million in receivables at less than one year. It therefore has liabilities totaling 2.31 billion euros more than its cash and short-term receivables, combined.

When you consider that this deficit exceeds the company’s 2.27 billion euro market capitalization, one might well be inclined to carefully review the balance sheet. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Rubis has a debt to EBITDA ratio of 2.7, which signals significant debt, but is still fairly reasonable for most types of businesses. But its EBIT was around 14.8 times its interest expense, implying that the company isn’t really paying a high cost to maintain that level of leverage. Even if the low cost turns out to be unsustainable, that’s a good sign. Rubis has increased its EBIT by 8.5% over the past year. While that barely brings us down, it’s a positive when it comes to debt. There is no doubt that we learn the most about debt from the balance sheet. But it is ultimately the company’s future profitability that will decide whether Rubis 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, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Rubis has recorded free cash flow of 58% of its EBIT, which is within normal range, given that free cash flow excludes interest and tax. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

On the balance sheet, the most notable positive for Rubis is the fact that it seems able to cover its interest charges with its EBIT with confidence. However, our other observations were not so encouraging. For example, his level of total liabilities makes us a little nervous about his debt. It should also be noted that companies in the Gas Utilities sector such as Rubis routinely resort to debt without any problem. Examining all of this data makes us somewhat cautious about Rubis’ level of indebtedness. While we understand that debt can improve return on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To do this, you need to find out about the 2 warning signs we spotted with Rubis (including 1 which does not suit us too much).

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

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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About Myra R.

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