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. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that bpost NV/SA (EBR:BPOST) uses debt in its business. But the more important question is: what risk does this debt create?
When is debt a problem?
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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for bpost/SA
What is bpost/SA’s net debt?
You can click on the graph below for historical figures, but it shows that in June 2022, bpost/SA had 1.48 billion euros in debt, an increase from 818.0 million euros, over a year. However, because it has a cash reserve of €905.3 million, its net debt is lower, at approximately €572.7 million.
How healthy is bpost/SA’s balance sheet?
According to the last published balance sheet, bpost/SA had liabilities of 1.39 billion euros at less than 12 months and liabilities of 1.67 billion euros at more than 12 months. In return, it had 905.3 million euros in cash and 836.6 million euros in receivables due within 12 months. Thus, its liabilities total 1.31 billion euros more than the combination of its cash and short-term receivables.
This deficit is considerable compared to its market capitalization of 1.34 billion euros, so he suggests that shareholders keep an eye on the use of debt by bpost/SA. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
bpost/SA has a low net debt to EBITDA ratio of only 1.4. And its EBIT covers its interest charges 17.1 times. So we’re pretty relaxed about his super-conservative use of debt. On the other hand, bpost/SA’s EBIT fell by 14% compared to last year. We believe that this type of performance, if repeated frequently, could well spell trouble for the stock. There is no doubt that we learn the most about debt from the balance sheet. But it is future revenues, more than anything, that will determine bpost/SA’s ability 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 earnings forecast report interesting.
Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Fortunately for all shareholders, bpost/SA has actually produced more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our point of view
We feel some apprehension about bpost/SA’s difficult EBIT growth rate, but we also have some positives to focus on. For example, its interest coverage and conversion of EBIT to free cash flow gives us some confidence in its ability to manage its debt. From all the angles mentioned above, it seems to us that bpost/SA is a somewhat risky investment due to its debt. Not all risk is bad, as it can boost stock returns if it pays off, but this leverage risk is worth keeping in mind. 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. Example: we have identified 2 warning signs for bpost/SA you should be aware.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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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.