ERAMET (EPA: ERA) takes risks with its recourse to debt
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 can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Above all, ERAMET SA (EPA: ERA) carries the debt. But does this debt worry shareholders?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest analysis for ERAMET
What is ERAMET’s debt?
You can click on the graph below for historical figures, but it shows that ERAMET had â¬ 3.09 billion in debt in June 2021, up from â¬ 3.36 billion a year earlier. However, he also had â¬ 1.94 billion in cash, so his net debt is â¬ 1.14 billion.
How strong is ERAMET’s balance sheet?
Zooming in on the latest balance sheet data, we see that ERAMET has liabilities of â¬ 2.25 billion within 12 months and liabilities of â¬ 3.28 billion due beyond. In return, he had â¬ 1.94 billion in cash and â¬ 374.0 million in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its (short-term) receivables by 3.21 billion euros.
This deficit casts a shadow over the â¬ 2.02 billion company, like a colossus towering over mere mortals. We would therefore monitor its record closely, without a doubt. In the end, ERAMET would probably need a major recapitalization if its creditors demanded repayment.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its 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).
Even if ERAMET’s debt is only 2.1%, its interest coverage is really very low at 2.3. This makes us wonder if the company is paying high interest because it is considered risky. Either way, it’s safe to say that the business has significant debt. Notably, ERAMET’s EBIT was higher than Elon Musk’s, gaining a whopping 432% from last year. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the future profitability of the activity will decide whether ERAMET will be able to strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, ERAMET has recorded significant negative free cash flow overall. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
A priori, the level of ERAMET’s total liabilities left us hesitant about the title, and its conversion of EBIT into free cash flow was no more attractive than the only empty restaurant on the busiest night of the year. But on the bright side, its EBIT growth rate is a good sign and makes us more optimistic. It is clear that we consider that ERAMET is really quite risky, because of the health of its balance sheet. We are therefore almost as wary of this stock as a hungry kitten falls into its owner’s fish pond: once bitten, twice shy, as they say. 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 have identified 3 warning signs for ERAMET (1 cannot be ignored) you must be aware.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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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 any stock 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 any of the stocks mentioned.