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. Like many other companies Südzucker AG (ETR:SZU) uses debt. But does this debt worry shareholders?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. 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 Südzucker
What is Südzucker’s debt?
You can click on the chart below for historical numbers, but it shows Südzucker had 1.71 billion euros in debt in November 2021, up from 1.83 billion euros a year earlier. However, he has €259.0 million in cash that offsets this, resulting in a net debt of around €1.45 billion.
A look at Südzucker’s responsibilities
The latest balance sheet data shows that Südzucker had liabilities of 1.90 billion euros due within a year, and liabilities of 2.71 billion euros falling due thereafter. In return, it had 259.0 million euros in cash and 1.17 billion euros in receivables due within 12 months. Thus, its liabilities total 3.19 billion euros more than the combination of its cash and short-term receivables.
Given that this deficit is actually greater than the company’s market capitalization of 2.60 billion euros, we think shareholders should really be watching Südzucker’s debt level, like a parent watching their child do. cycling 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.
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 ).
Südzucker’s net debt to EBITDA ratio of around 2.3 suggests only moderate use of debt. And its high interest coverage of 15.5 times makes us even more comfortable. Above all, Südzucker has increased its EBIT by 54% over the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Südzucker’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.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past two years, Südzucker has recorded free cash flow of 70% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
Südzucker’s ability to cover its interest charges with its EBIT and its EBIT growth rate has reinforced our ability to manage its debt. But truth be told, his total passive level had us biting our nails. Given this range of data points, we believe Südzucker is in a good position to manage its level of leverage. But be warned: we believe debt levels are high enough to warrant continued monitoring. 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 1 warning sign for Südzucker you should be aware.
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.
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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.