Down Debt

The Bidvest Group (JSE: BVT) seems to be using debt quite wisely


Howard Marks put 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 every investor practice that I know is worried. When we think about how risky a business is, we always like to look at its use of debt, because overloading debt can lead to bankruptcy. We can see that The Bidvest Group Limited (JSE: BVT) uses debt in its business. But should shareholders be concerned about its use of debt?

When is Debt a Problem?

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 costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first look at cash and debt levels, together.

See our latest analysis for Bidvest Group

How much debt does the Bidvest group have?

As you can see below, Bidvest Group had R20.8 billion in debt in June 2021, up from R29.7 billion a year earlier. However, because it has a cash reserve of R3.52 billion, its net debt is less, at around R17.3 billion.

JSE: BVT History of debt to equity December 13, 2021

A look at the liabilities of the Bidvest group

Zooming in on the latest balance sheet data, we can see that Bidvest Group had a liability of R33.3b due within 12 months and a liability of R24.3b due beyond. In compensation for these obligations, he had cash of R3.52 billion as well as claims valued at R14.8 billion maturing within 12 months. Thus, its liabilities total 39.3 billion rand more than the combination of its cash and short-term receivables.

This is a mountain of leverage compared to its market cap of R62.9b. This suggests that shareholders would be greatly diluted if the company needed to consolidate its balance sheet quickly.

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 compared to EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

The Bidvest group has a net debt of 1.7 times EBITDA, which is not too much, but its interest coverage seems a bit weak, with EBIT at only 5.4 times the expenses. ‘interests. While we’re not worried about these numbers, it’s worth noting that the company’s cost of debt does have a real impact. It should be noted that Bidvest Group’s EBIT has skyrocketed after the rain, gaining 46% in the last twelve months. This will make it easier to manage your debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Bidvest Group’s ability to maintain a healthy balance sheet going forward. 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. 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, Bidvest Group has recorded free cash flow representing 76% of its EBIT, which is close to normal, given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.

Our point of view

Fortunately, the impressive EBIT growth rate of the Bidvest group means that it has the upper hand over its debt. But frankly, we think his total passive level undermines that feeling a bit. Looking at all of the above factors together, it seems to us that the Bidvest Group can manage their debt quite comfortably. On the plus side, this leverage can increase returns to shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for the Bidvest group which you need to know before investing here.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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.