Ceconomy (ETR: CEC) seems to be using debt quite wisely

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 risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Ceconomy SA (ETR: CEC) uses debt. But does this debt worry shareholders?

What risk does debt entail?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest analysis for Ceconomy

How much debt does Ceconomy have?

You can click on the graph below for the historical figures, but it shows that Ceconomy had € 343.0 million in debt in March 2021, up from € 1.53 billion a year earlier. But he also has € 998.0 million in cash to make up for that, which means he has € 655.0 million in net cash.

XTRA: CEC Debt to Equity History July 9, 2021

How strong is Ceconomy’s balance sheet?

According to the latest published balance sheet, Ceconomy had liabilities of € 7.10 billion within 12 months and liabilities of € 2.16 billion due beyond 12 months. In return, he had € 998.0 million in cash and € 1.61 billion in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its (short-term) receivables by 6.66 billion euros.

The deficit here weighs heavily on the € 1.42 billion company itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. So we would be watching its record closely, without a doubt. Ultimately, Ceconomy would likely need a major recapitalization if its creditors demanded repayment. Ceconomy has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt, even though it does have very large liabilities, in total.

Also positive, Ceconomy has increased its EBIT by 21% over the past year, which should make it easier to repay debt going forward. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Ceconomy 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 needs free cash flow to pay off debts; accounting profits are not enough. While Ceconomy has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building (or erodes) that cash balance. . Fortunately for all shareholders, Ceconomy has actually generated more free cash flow than EBIT over the past three years. There is nothing better than cash flow to stay in the good graces of your lenders.

In summary

While Ceconomy has more liabilities than liquid assets, it also has net cash of € 655.0 million. And he impressed us with free cash flow of € 314m, or 141% of his EBIT. So we have no problem with Ceconomy’s use of debt. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 2 warning signs for Ceconomy which you should know before investing here.

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.

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