Down Debt

Here’s why BayWa (ETR:BYW) is weighed down by debt

Howard Marks said 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 that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We notice that BayWa Aktiengesellschaft (ETR:BYW) has debt on its balance sheet. But should shareholders worry about its use of debt?

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for BayWa

How much debt does BayWa bear?

As you can see below, BayWa had 3.87 billion euros in debt, as of September 2021, which is about the same as the previous year. You can click on the graph for more details. On the other hand, he has €229.5 million in cash, resulting in a net debt of around €3.64 billion.

XTRA: BYW Debt to Equity January 25, 2022

A Look at BayWa’s Responsibilities

According to the last published balance sheet, BayWa had liabilities of 5.30 billion euros maturing within 12 months and liabilities of 3.91 billion euros maturing beyond 12 months. In compensation for these obligations, it had cash of €229.5 million as well as receivables worth €2.35 billion at less than 12 months. It therefore has liabilities totaling 6.64 billion euros more than its cash and short-term receivables, combined.

The deficiency here weighs heavily on the 1.35 billion euro business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. So we definitely think shareholders need to watch this one closely. After all, BayWa would likely need a major recapitalization if it were to pay its creditors today.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

BayWa shareholders face the double whammy of a high net debt to EBITDA ratio (9.7) and fairly low interest coverage, as EBIT is only 1.8 times operating expenses. ‘interests. This means that we would consider him to be heavily indebted. The good news is that BayWa has grown its EBIT by 97% smoothly over the past twelve months. Like a mother’s loving embrace of a newborn, this kind of growth builds resilience, putting the company in a stronger position to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether BayWa can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, BayWa has burned a lot of cash. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

At first glance, BayWa’s conversion of EBIT to free cash flow left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant on the busiest night of the year. year. But on the bright side, its EBIT growth rate is a good sign and makes us more optimistic. We are abundantly clear that we consider BayWa to be quite risky indeed, given the health of its balance sheet. For this reason, we are quite cautious about the stock and believe shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that BayWa displays 3 warning signs in our investment analysis , and 2 of them make us uncomfortable…

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

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.