Is Chorus (NZSE:CNU) using too much debt?

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Warren Buffett said: “Volatility is far from synonymous with risk. 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. We can see that Limited choir (NZSE: CNU) uses debt in its business. But the more important question is: what risk does this debt create?

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

Discover our latest analyzes for Chorus

What is Chorus’ debt?

You can click on the chart below for historical figures, but it shows Chorus had NZ$3.04 billion in debt in December 2021, up from NZ$3.30 billion a year before. On the other hand, he has NZ$84.0 million in cash, resulting in a net debt of around NZ$2.95 billion.

NZSE: CNU Debt to Equity History June 7, 2022

A look at Chorus’ responsibilities

The latest balance sheet data shows that Chorus had liabilities of NZ$477.0 million due within one year, and liabilities of NZ$4.34 billion falling due thereafter. In compensation for these obligations, it had liquid assets of NZ$84.0 million as well as receivables valued at NZ$146.0 million maturing within 12 months. It therefore has liabilities totaling NZ$4.59 billion more than its cash and short-term receivables, combined.

Given that this deficit is actually greater than the company’s market capitalization of NZ$3.17 billion, we think shareholders really should be watching Chorus’ debt levels, like a parent watching their child. riding a bike for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.

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.

Low interest coverage of 1.5 times and an abnormally high net debt to EBITDA ratio of 5.2 shook our confidence in Chorus like a punch in the gut. The debt burden here is considerable. More worryingly, Chorus has seen its EBIT drop by 7.0% over the last twelve months. If he continues like this, paying off his debt will be like running on a treadmill – a lot of effort for little progress. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Chorus can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Chorus has experienced significant negative free cash flow, in total. While investors no doubt expect a reversal of this situation in due course, it clearly means that its use of debt is more risky.

Our point of view

At first glance, Chorus’ interest coverage left us hesitant about the stock, and its EBIT-to-free-cash-flow conversion was no more appealing than the single empty restaurant on the busiest night in the world. ‘year. And what’s more, its net debt to EBITDA also fails to inspire confidence. After reviewing the data points discussed, we believe that Chorus has too much debt. While some investors like this kind of risky play, it’s definitely not our cup of tea. 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. For example – Chorus a 2 warning signs we think you should know.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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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