Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Marel hf. (ICE: MAREL) uses debt in its activities. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. 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. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Marel hf
What is Marel hf’s net debt?
As you can see below, at the end of September 2021, Marel hf had 206.7 million euros in debt, up from 142.5 million euros a year ago. Click on the image for more details. However, he also had â¬ 66.2 million in cash, so his net debt is â¬ 140.5 million.
A look at the responsibilities of Marel hf
The latest balance sheet data shows that Marel hf had debts of 557.5 million euros due within one year, and debts of 349.7 million euros due thereafter. In return, he had â¬ 66.2 million in cash and â¬ 253.6 million in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its receivables (short term) by â¬ 587.4 million.
Given that the listed Marel hf shares are worth a total of 4.28 billion euros, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Marel hf has a low net debt to EBITDA ratio of just 0.72. And its EBIT covers its interest costs 24.4 times more. So we’re pretty relaxed about its ultra-conservative use of debt. While Marel hf does not appear to have gained much on the EBIT line, at least earnings remain stable for now. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Marel hf’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Marel hf has generated free cash flow of 81% of its very robust EBIT, more than we expected. This positions it well to repay debt if it is desirable.
Our point of view
Marel hf’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And this is only the beginning of good news as its conversion from EBIT to free cash flow is also very encouraging. Overall, we think Marel hf’s use of debt seems quite reasonable and we are not concerned about that. While debt comes with risk, when used wisely, it can also generate a better return on equity. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that Marel hf shows 1 warning sign in our investment analysis , you must know…
If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.
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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