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. Above all, Coca-Cola Europapacific Partners PLC (AMS:CCEP) is in debt. But does this debt worry shareholders?
When is debt dangerous?
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. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
See our latest analysis for Coca-Cola Europacific Partners
What is the net debt of Coca-Cola Europacific Partners?
You can click on the chart below for historical numbers, but it shows Coca-Cola Europacific Partners had €12.0 billion in debt in July 2022, up from €12.9 billion a year earlier. However, since it has a cash reserve of 2.06 billion euros, its net debt is less, at around 9.93 billion euros.
How healthy is Coca-Cola Europacific Partners’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Coca-Cola Europacific Partners had liabilities of €7.42 billion due within 12 months and liabilities of €15.2 billion due beyond. On the other hand, it had 2.06 billion euros in cash and 2.86 billion euros in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €17.7 billion.
This deficit is considerable compared to its very large market capitalization of 21.9 billion euros, so it suggests that shareholders monitor the use of debt by Coca-Cola Europacific Partners. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.
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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Coca-Cola Europacific Partners has a debt-to-EBITDA ratio of 3.9, which signals significant debt, but is still fairly reasonable for most types of businesses. However, its interest coverage of 17.7 is very high, suggesting that debt interest charges are currently quite low. Importantly, Coca-Cola Europacific Partners has grown its EBIT by 69% over the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Coca-Cola Europacific Partners 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 company can only repay its debts with cold hard cash, not with book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Coca-Cola Europacific Partners has actually generated more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Fortunately, Coca-Cola Europacific Partners’ impressive interest coverage means it has the upper hand on its debt. But, on a darker note, we’re a bit concerned about its net debt to EBITDA. Looking at all of the above factors together, it seems to us that Coca-Cola Europacific Partners can manage its debt quite comfortably. On the plus side, this leverage can increase shareholder returns, but the potential downside is more risk of loss, so it’s worth keeping an eye on the balance sheet. 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. Know that Coca-Cola Europacific Partners presents 2 warning signs in our investment analysis you should know…
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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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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