Here’s Why Invexans (SNSE: INVEXANS) Can Responsibly Manage Debt
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, âThe biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Invexans SA (SNSE: INVEXANS) uses debt. But does this debt concern shareholders?
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. 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. 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.
Discover our latest analysis for Invexans
What is the debt of Invexans?
As you can see below, at the end of June 2021, Invexans had $ 469.3 million in debt, up from $ 430.7 million a year ago. Click on the image for more details. However, given that it has a cash reserve of US $ 237.0 million, its net debt is less, at approximately US $ 232.2 million.
How strong is Invexans’ balance sheet?
We can see from the most recent balance sheet that Invexans had liabilities of US $ 449.2 million due within one year and liabilities of US $ 634.0 million due beyond. . On the other hand, it had US $ 237.0 million in cash and US $ 209.0 million in receivables due within one year. It therefore has a liability totaling US $ 637.1 million more than its cash and short-term receivables combined.
This is a mountain of leverage compared to its market cap of US $ 937.6 million. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
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).
With a debt to EBITDA ratio of 1.9, Invexans uses debt smartly but responsibly. And the fact that her last twelve months of EBIT was 7.5 times her interest expense ties in with that theme. We also note that Invexans improved its EBIT from a loss last year to a positive amount of $ 89 million. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the results of Invexans that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore important to check how much of its earnings before interest and taxes (EBIT) converts into actual free cash flow. Fortunately for all shareholders, Invexans actually generated more free cash flow than EBIT over the past year. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
On the balance sheet, the bright spot for Invexans is the fact that it appears to be able to confidently convert EBIT into free cash flow. However, our other observations were not so encouraging. For example, his total liability level makes us a little nervous about his debt. Given this range of data points, we believe Invexans is well positioned to manage its debt levels. That said, the load is heavy enough that we recommend that any shareholder watch it closely. Over time, stock prices tend to follow earnings per share, so if you are interested in Invexans, you can click here to view an interactive graph of its historical earnings per share.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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 documents. Simply Wall St has no position in the mentioned stocks.
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