Bayerische Motoren Werke (ETR: BMW) has a somewhat strained record

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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” 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 Bayerische Motoren Werke Aktiengesellschaft (ETR: BMW) uses debt in its business. But should shareholders be concerned about its use of debt?

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. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Discover our latest analysis for Bayerische Motoren Werke

What is the debt of Bayerische Motoren Werke?

You can click on the graph below for historical figures, but it shows that Bayerische Motoren Werke had € 101.9 billion in debt in June 2021, up from € 115.0 billion a year earlier. On the other hand, it has 17.2 billion euros in liquidity leading to a net debt of around 84.7 billion euros.

XTRA: history of debt on BMW equity 3 November 2021

A look at the responsibilities of Bayerische Motoren Werke

The most recent balance sheet shows that Bayerische Motoren Werke had liabilities of 74.3 billion euros due within one year and liabilities of 79.0 billion euros due beyond. In return, he had € 17.2 billion in cash and € 3.41 billion in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its (short-term) receivables by 132.6 billion euros.

This deficit casts a shadow over the € 57.7 billion company, like a colossus towering over mere mortals. We therefore believe that shareholders should watch it closely. In the end, Bayerische Motoren Werke would likely need a major recapitalization if its creditors demanded repayment.

We measure a company’s debt load relative to its earning capacity 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 costs (interest coverage). 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).

As it turns out, Bayerische Motoren Werke has a rather worrying net debt to EBITDA ratio of 5.2 but very strong interest coverage of 58.6. So either he has access to very cheap long-term debt or his interest charges will go up! Fortunately, Bayerische Motoren Werke is increasing its EBIT faster than former Australian Prime Minister Bob Hawke, posting a gain of 132% in the last twelve months. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately the future profitability of the company will decide whether Bayerische Motoren Werke can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business can only pay off its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Bayerische Motoren Werke’s free cash flow has been 29% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.

Our point of view

At first glance, Bayerische Motoren Werke’s net debt to EBITDA left us hesitant about the stock, and its total liability level was no more attractive than the single empty restaurant on the busiest night of the year. But on the bright side, his interest coverage is a good sign and makes us more optimistic. Looking at the balance sheet and taking all of these factors into account, we think debt makes Bayerische Motoren Werke stock a bit risky. Some people like this kind of risk, but we are aware of the potential pitfalls, so we would probably prefer him to carry less debt. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, Bayerische Motoren Werke has 3 warning signs (and 2 that shouldn’t be ignored) we think you should be aware of.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

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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