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. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Verallia Société Anonyme (EPA: VRLA) uses debt in its business. But the most important question is: what risk does this debt create?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Verallia Société Anonyme
What is the debt of Verallia Société Anonyme?
You can click on the graph below for historical figures, but it shows that Verallia Société Anonyme had € 1.71 billion in debt in June 2021, up from € 1.87 billion a year earlier. However, because it has a cash reserve of € 497.2 million, its net debt is lower, at around € 1.21 billion.
How strong is Verallia Société Anonyme’s balance sheet?
We can see from the most recent balance sheet that Verallia Société Anonyme had liabilities of 1.01 billion euros due within one year, and liabilities of 1.88 billion euros due beyond. On the other hand, it had cash of € 497.2 million and € 172.9 million in receivables within one year. Its liabilities thus exceed the sum of its cash and its receivables (short term) by 2.21 billion euros.
That’s a mountain of leverage compared to its market capitalization of 3.42 billion euros. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Verallia Société Anonyme’s net debt to EBITDA ratio of around 1.7 suggests only a moderate recourse to debt. And its strong 11.4 times coverage interest makes us even more comfortable. Note that Verallia Société Anonyme increased its EBIT by 29% last year, which should facilitate debt repayment in the future. There is no doubt that we learn the most about debt from the balance sheet. But it is above all the future results that will determine the ability of Verallia Société Anonyme to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the last three years, Verallia Société Anonyme has recorded free cash flow of 74% of its EBIT, which is close to normal, given that free cash flow is understood to be excluding interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, Verallia Société Anonyme’s impressive EBIT growth rate means that it has the upper hand over its debt. But, on a darker note, we’re a little concerned with its total liability level. When you consider the range of the above factors, it appears that Verallia Société Anonyme is quite reasonable in its use of debt. This means that they are taking a bit more risk, in the hope of increasing shareholder returns. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for Verallia Société Anonyme that you need to be aware of.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow-growing stocks.
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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 any stock 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 any of the stocks mentioned.