Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Company of Companies CFE SA (EBR:CFEB) uses debt. But should shareholders worry about its use of debt?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. 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.
Discover our latest analysis for Compagnie d’Entreprises CFE
What is the debt of Compagnie d’Entreprises CFE?
The image below, which you can click on for more details, shows that Compagnie d’Entreprises CFE had a debt of €223.3m at the end of December 2021, compared to €1.26bn over one year. However, he has €143.6m in cash to offset this, resulting in a net debt of around €79.7m.
What is the state of Compagnie d’Entreprises CFE’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Compagnie d’Entreprises CFE had liabilities of €3.20 billion due within 12 months and liabilities of €142.2 million due -of the. On the other hand, it had €143.6 million in cash and €281.3 million in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €2.92 billion.
Given that this deficit is in fact greater than the company’s market capitalization of 2.70 billion euros, we believe that shareholders should really watch the indebtedness of Compagnie d’Entreprises CFE, like a parent watches his child. riding a bike for the first time. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer 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 ).
Compagnie d’Entreprises CFE has a low ratio of net debt to EBITDA of only 1.2. And its EBIT covers its interest charges 13.6 times. So we’re pretty relaxed about his super-conservative use of debt. In addition, Compagnie d’Entreprises CFE has increased its EBIT by 79% over the last twelve months, and this growth will facilitate the management of its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is ultimately the company’s future profitability that will decide whether Compagnie d’Entreprises CFE 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, while the taxman may love accounting profits, lenders only accept cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Fortunately for all shareholders, Compagnie d’Entreprises CFE has actually produced more free cash flow than EBIT over the past three years. There’s nothing better than incoming money to stay in the good books of your lenders.
Our point of view
Compagnie d’Entreprises CFE’s interest coverage suggests it can manage its debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But we have to admit that we find that his level of total liabilities has the opposite effect. Considering all this data, it seems to us that Compagnie d’Entreprises CFE has a fairly sensible approach to indebtedness. This means they take on a bit more risk, hoping to increase shareholder returns. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you have also achieved this achievement, you are in luck, because today you can consult this interactive graph of the historical earnings per share of Compagnie d’Entreprises CFE for free.
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.