Understanding corporate debt – Moneyweb


Most investors, and much market commentary, focuses on the earnings listed companies. There are thousands of revenue metrics (some suspiciously creative) and many ways to interpret them. Emphasis is also placed on the valuation of these revenues.

But a good investment also means being able to avoid major losses, and in this regard, there is often not enough discussion around corporate debt.

As the world goes through tough economic times, as interest rates rise and consumers tighten their belts, analyzing the leverage of listed companies becomes increasingly relevant.

In short, profitable, cash-generating businesses without debt are highly unlikely to go bankrupt overnight.

Thus, more debt (and less profit) is often correlated with higher financial risk.

For this reason, I’m going to unzip some common debt ratios and highlight JSE stocks that have those ratios in dangerous territory (on a gross debt basis, but one can and should take money out of these ratios to arrive at net ratios).


Interest Coverage Ratio (ICR) = Ebitda/interest expense

How to calculate it: A range of earnings measures can be used to calculate ICR, but the most common is to take Earnings Before Interest, Taxes, Depreciation, and Amortization (Ebitda) – considered an indicator of accounting cash before gearing – and divide it by the interest charges.

What this means: This measure indicates how much profit (and related cash flow) can drop before the company struggles to repay the interest arising from its debt (it ignores the principal payment). At worst, a company can freeze principal repayments and continue to pay accumulating interest charges in perpetuity.

JSE stocks with the lowest ICR (non-negative/non-zero)
Coded Last name Interest coverage
LUX Luxury Holdings Ltd 0.10x
SSK Stefanutti Stocks Holdings Ltd 0.10x
EEL Efora Energy Ltd 0.30x
CSA Ascendis Health Ltd. 0.40x
NPN Naspers Ltd 0.50x
TGO Tsogo Sun Hotels Ltd 0.60x
WEZ Wesizwe Platinum Ltd 0.60x
BUC Buffalo Coal Corporation 0.70x
NUT Nutritional Holdings Ltd 0.70x
MKR Montauk Renewables Inc 0.90x
TONNE Tongaat Hulett Ltd 0.90x
REC Rebosis real estate fund 1.00x

Source: media profile

Debt/Ebitda ratio = debt/Ebitda

How to calculate it: Again, using Ebitda, take on debt and calculate the percentage of a company’s annual Ebitda that debt represents.

What this means: It is a measure of the number of years of Ebitda it would take to repay the capital owed by a company.

In other words, it is the number of years of profits that shareholders can lose to pay off a company’s debt.

JSE Stocks with Highest Debt to Ebitda Ratio

Coded Last name Net debt/Ebitda Gross debt/Ebitda
HMN Hammerson 92.2x 113.0x
HLC town lodge 46.6x 46.7x
CCO Capital and counties 17.4x 26.3x
Earth Crusher 8.3x 13.3x
TGO Hotels in Tsogo 10.9x 12.7x
TCP Dealing Capital 11.3x 12.3x
SNH Steinhof 10.9x 11.9x
ERS Sirius Real Estate 9.7x 11.1x
LTE Lighthouse accessory. 10.1x 10.9x
FFA Fortress Reit A 9.3x 9.6x
FFB Fortress Reit B 9.3x 9.6x
REITs Investec prop. 9.2x 9.6x
IML Industrial REIT 7.2x 8.7x
NDE Emira 7.8x 7.9x
PNR NEPI Rockcastle 6.1x 7.7x
VKE Vukile 7.4x 7.7x
SMS textainer 7.2x 7.6x
GRT Growth point 7.0x 7.2x
RDF redefine 6.5x 6.8x

Source: Refinitiv

Debt to equity ratio (D:E) = debt to equity

How to calculate it: If you take debt and divide it by equity, you can see what percentage of assets are debt-funded in a business.

What this means: This ratio shows what percentage of each R1 of a company’s assets is financed by debt versus equity. If a company were to be liquidated, the more debt that funded the assets relative to equity means less is likely to be left for shareholders.

JSE stocks with the highest D:E ratio

Coded Last name Debt Equity
JSC Jasco Electronics Holdings Ltd 990.1%
NHL Nictus Holdings Ltd – Namibia 812.8%
PIK Pick n Pay Ltd Stores 791.2%
OAO Oando Plc 607.3%
WHL Woolworths Holdings Ltd 547.7%
CMO Chrometco Ltd 497.6%
AVL Advanced Health Ltd. 473.1%
SMS Textainer Group Holdings SA 381.1%
WEZ Wesizwe Platinum Ltd 356.3%
REN Renergen AG 340.2%
GST Tsogo Sun Gaming Ltd 317.2%
REC Rebosis real estate fund 298.5%
PSP Spar Group Ltd. 296.9%
CWM Multichoice Group Ltd. 245.4%
PSV PSV Holdings Ltd 235%
HLC City Lodge Hotels Ltd 234.7%
RBF Famous Brands Ltd 227.2%

Source: media profile

Debt to Assets Ratio (D:A) = Debt to Total Assets

How to calculate it: Just like D:E above, incur debt, but this time calculate it as a percentage of a company’s assets.

What this means: This is similar to D:E, as it shows you the underlying balance sheet against which a business has borrowed, but this time focusing only on the assets of the business.

JSE stocks with the highest D:A ratio
Coded Last name Debt: assets
JSE JSE 92.1%
SNH Steinhof 89.4%
SMS textainer 72.5%
GST Tsogo Sun Gaming 63.9%
HLC town lodge 63.5%
WHL Woolworth 60.9%
SU international sun 60.5%
Earth Crusher 60.0%
PIK Choose and pay 56.7%
TCP Dealing Capital 52.4%
RBF Famous brands 49.3%
PSP spar 46.4%
HPS Shoprite 44.4%
MSM Massmart 43.0%
ATT REIT Attacq 42.9%
ERS Sirius Real Estate 42.7%
VKE Vukile 42.6%
NTC Netcare 42.5%
GRT Growth point 41.6%
ANH AB InBev 40.8%
RDF redefine 40.8%
REITs Investec Real Estate Fund 40.1%

Source: media profile

While useful, all of these ratios have their flaws.

Highly profitable companies that buy back shares, for example, can “eat up” their own equity, making their D:E ratios artificially high, while being low-risk companies themselves.

Similarly, many companies do not have their most profitable assets on their balance sheet (such as employees or undeveloped mineral resources), which skews D:A ratios.

Finally, solvency (as revealed by debt analysis) is not the same thing as liquidity, so even companies with little debt can experience speed bumps if their cash flow and short-term liabilities are not sufficiently Covered.

Despite this, it remains relevant – and is likely to become more so – for investors to consider the downsides, risks and, indeed, debt of the listed companies in which they are considering investing.


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