Is Vidrala (BME: VID) using too much debt?
David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, Vidrala, SA (BME: VID) is in debt. But the real question is whether this debt makes the business risky.
When Is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Vidrala
What is Vidrala’s debt?
You can click on the graph below for the historical figures, but it shows that Vidrala had € 243.4 million in debt in June 2021, up from € 333.1 million a year earlier. However, because it has a cash reserve of € 108.2 million, its net debt is lower, at around € 135.2 million.
A look at Vidrala’s responsibilities
According to the latest published balance sheet, Vidrala had liabilities of 378.8 million euros less than 12 months and liabilities of 289.8 million euros over 12 months. On the other hand, it had cash of € 108.2 million and € 313.0 million in receivables within one year. It therefore has total liabilities of € 247.5 million more than its combined cash and short-term receivables.
Given that Vidrala has a market capitalization of 2.56 billion euros, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Vidrala has a low net debt to EBITDA ratio of just 0.45. And its EBIT covers its interest costs 67.0 times more. So we’re pretty relaxed about its ultra-conservative use of debt. Also positive, Vidrala has increased its EBIT by 27% over the past year, which should make it easier to repay debt going forward. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Vidrala can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Vidrala has recorded free cash flow of 76% of its EBIT, which is close to normal, given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
The good news is that Vidrala’s demonstrated ability to cover her interest costs with her EBIT delights us like a fluffy puppy does a toddler. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Overall, we don’t think Vidrala is taking bad risks, as its leverage appears modest. We are therefore not worried about the use of a small leverage on the balance sheet. Over time, stock prices tend to follow earnings per share, so if you are interested in Vidrala, you can click here to view an interactive graph of its historical earnings per share.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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