David Iben put it well when he said: âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ 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 ENAV SpA (BIT: ENAV) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest analysis for ENAV
How much debt does ENAV have?
The image below, which you can click for more details, shows that in June 2021, the ENAV had a debt of 517.3 million euros, compared to 333.8 million euros in one year. . However, because it has a cash reserve of â¬ 149.8 million, its net debt is lower, at around â¬ 367.4 million.
How healthy is ENAV’s track record?
The most recent balance sheet shows that ENAV had debts of â¬ 416.8 million maturing within one year and debts of â¬ 693.4 million beyond. In return, he had â¬ 149.8 million in cash and â¬ 223.5 million in receivables due within 12 months. Its liabilities therefore amount to â¬ 736.9 million more than the combination of its cash and short-term receivables.
While that might sound like a lot, it’s not so bad since ENAV has a market capitalization of 2.10 billion euros, so it could probably strengthen its balance sheet by raising capital if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky.
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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
ENAV’s net debt / EBITDA ratio of around 1.9 suggests only moderate use of debt. And its imposing EBIT of 14.7 times its interest costs, means the debt burden is as light as a peacock feather. It is important to note that ENAV’s EBIT has fallen 56% over the past twelve months. If this earnings trend continues, paying off debt will be about as easy as driving cats on a roller coaster. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine ENAV’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.
Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. In the last three years, ENAV has recorded a total negative free cash flow. Debt is much riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.
Our point of view
At first glance, ENAV’s conversion of EBIT to free cash flow left us hesitant about the stock, and its EBIT growth rate was no more attractive than the single empty restaurant on the most night. responsible for the year. But at least it’s decent enough to cover its interest costs with its EBIT; it’s encouraging. It should also be noted that companies in the infrastructure sector like ENAV generally use debt without a problem. Looking at the balance sheet and taking all of these factors into account, we think debt makes ENAV stock a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. 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. Note that ENAV displays 3 warning signs in our investment analysis , and 2 of them are a bit disturbing …
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page 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 material. Simply Wall St has no position in any of the stocks mentioned.
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