Here’s why Veolia Environnement (EPA:VIE) can manage its debt responsibly
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Veolia Environment SA (EPA:VIE) uses debt in its business. But the more important question is: what risk does this debt create?
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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Veolia Environnement
What is Veolia Environnement’s debt?
You can click on the graph below for historical figures, but it shows that in December 2021, Veolia Environnement had 19.3 billion euros in debt, an increase from 18.3 billion euros, on a year. However, it also had €12.0 billion in cash, so its net debt is €7.37 billion.
How strong is Veolia Environnement’s balance sheet?
According to the latest published balance sheet, Veolia Environnement had liabilities of 23.8 billion euros at less than 12 months and liabilities of 16.5 billion euros at more than 12 months. On the other hand, it had 12.0 billion euros in cash and 10.2 billion euros in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €18.1 billion.
That’s a mountain of leverage, even compared to its gargantuan market cap of €19.7 billion. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.
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 amortization and depreciation expense.
Veolia Environnement has net debt worth 2.3x EBITDA, which isn’t too much, but its interest coverage seems a bit low, with EBIT at just 6.1x interest expense. interests. This is largely due to the company’s large amortization charges, which no doubt means that its EBITDA is a very generous measure of earnings, and that its debt may be heavier than it first appears. on board. Above all, Veolia Environnement has increased its EBIT by 45% over the last twelve months, and this growth will facilitate the management of its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is above all future results that will determine Veolia Environnement’s ability to maintain a healthy balance sheet in the future. 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 must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Veolia Environnement has recorded free cash flow representing no less than 99% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.
Our point of view
Veolia Environnement’s conversion of EBIT to free cash flow suggests it can manage its debt as easily as Cristiano Ronaldo could score a goal against an under-14 goalkeeper. But truth be told, we think his total passive level undermines that impression a bit. It should also be noted that Veolia Environnement is in the Integrated Utilities sector, which is often considered quite defensive. In view of all of the aforementioned elements, it appears to us that Veolia Environnement can manage its debt quite comfortably. On the plus side, this leverage can increase shareholder returns, but the potential downside is more risk of loss, so it’s worth keeping an eye on the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To do this, you need to find out about the 4 warning signs we spotted with Veolia Environnement (including 1 that makes us a little uncomfortable).
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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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.