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 Imerys S.A. (EPA:NK) 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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Imerys
What is Imerys’ debt?
The image below, which you can click on for more details, shows that Imerys had a debt of 2.04 billion euros at the end of December 2021, a reduction of 2.17 billion euros over one year . However, he also had €577.2 million in cash, so his net debt is €1.46 billion.
How strong is Imerys’ balance sheet?
We can see from the most recent balance sheet that Imerys had liabilities of 1.45 billion euros within one year and liabilities of 2.73 billion euros beyond. On the other hand, it has cash of €577.2 million and €853.0 million in receivables at less than one year. Thus, its liabilities total 2.74 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 2.61 billion euros, we believe shareholders should really be watching Imerys’ level of debt, like a parent watching their child. riding a bike 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 measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). Thus, we consider debt to earnings with and without depreciation and amortization charges.
Imerys’ net debt to EBITDA ratio of approximately 2.1 suggests only moderate recourse to debt. And its towering EBIT of 12.4 times its interest expense means that the debt burden is as light as a peacock feather. It should be noted that Imerys’ EBIT has jumped like bamboo after the rain, gaining 34% over the last twelve months. This will make it easier to manage your debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is ultimately the activity’s future profitability that will decide whether Imerys 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 company can only repay its debts with cold hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Imerys has produced strong free cash flow equivalent to 60% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
Imerys’ interest coverage is a real positive in this analysis, as is its EBIT growth rate. That said, its level of total liabilities makes us somewhat aware of potential future risks to the balance sheet. Given this range of data points, we believe that Imerys is in a good position to manage its level of indebtedness. But be warned: we believe debt levels are high enough to warrant continued monitoring. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 3 warning signs we spotted with Imerys.
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.