Koninklijke Vopak (AMS:VPK) takes some risk with its use of debt

Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, Koninklijke Vopak AG (AMS:VPK) is in debt. But does this debt worry shareholders?

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

See our latest review for Koninklijke Vopak

What is Koninklijke Vopak’s net debt?

As you can see below, at the end of December 2021, Koninklijke Vopak had 2.29 billion euros in debt, compared to 1.96 billion euros a year ago. Click on the image for more details. However, he has 73.4 million euros in cash which compensates for this, resulting in a net debt of around 2.21 billion euros.

ENXTAM: VPK Debt to Equity History April 12, 2022

A look at the responsibilities of Koninklijke Vopak

The latest balance sheet data shows that Koninklijke Vopak had liabilities of €960.4 million due within a year, and liabilities of €2.78 billion falling due thereafter. In return, it had €73.4 million in cash and €264.0 million in receivables due within 12 months. It therefore has liabilities totaling 3.40 billion euros more than its cash and short-term receivables, combined.

This deficit is considerable compared to its market capitalization of 3.55 billion euros, so it suggests that shareholders monitor Koninklijke Vopak’s use of debt. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Koninklijke Vopak has a debt/EBITDA ratio of 3.8 and its EBIT covered its interest charges 3.1 times. Taken together, this implies that, while we wouldn’t like to see debt levels increase, we think he can manage his current leverage. Given the leverage, it is hardly ideal that Koninklijke Vopak’s EBIT has been fairly flat over the past twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Koninklijke Vopak’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Koninklijke Vopak’s free cash flow amounted to 33% of its EBIT, less than expected. This low cash conversion makes debt management more difficult.

Our point of view

To be frank, Koninklijke Vopak’s level of total liabilities and its history of covering its interest charges by its EBIT makes us rather uncomfortable with its level of leverage. But at least its EBIT growth rate isn’t that bad. Overall, we think it’s fair to say that Koninklijke Vopak has enough debt that there are real risks around the balance sheet. If all goes well, it can pay off, but the downside of this debt is a greater risk of permanent losses. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we found 2 warning signs for Koninklijke Vopak which you should be aware of before investing here.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

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.

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