These 4 measurements indicate that Arcadis (AMS: ARCAD) uses its debt safely

Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, Arcadis SA (AMS: ARCAD) carries the debt. 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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. 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 Arcadis

What is Arcadis’ debt?

You can click on the graph below for the historical figures, but it shows that Arcadis had € 379.2 million in debt in June 2021, up from € 585.1 million a year earlier. On the other hand, it has 272.7 million euros in cash, leading to a net debt of around 106.5 million euros.

ENXTAM: ARCAD History of debt to equity December 8, 2021

A look at Arcadis’ responsibilities

According to the last published balance sheet, Arcadis had liabilities of € 1.14 billion within 12 months, and liabilities of € 639.7 million due beyond 12 months. On the other hand, it had cash of € 272.7 million and € 1.07 billion in receivables within one year. It therefore has total liabilities of € 434.4 million more than its combined cash and short-term receivables.

Considering that the listed Arcadis shares are worth a total of 3.65 billion euros, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.

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).

Arcadis has a low net debt to EBITDA ratio of just 0.45. And its EBIT easily covers its interest costs, being 10.2 times higher. So we’re pretty relaxed about its ultra-conservative use of debt. Another good sign, Arcadis was able to increase its EBIT by 28% in twelve months, thus facilitating the repayment of its debt. When analyzing debt levels, the balance sheet is the obvious place to start. But it’s future profits, more than anything, that will determine Arcadis’ ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Finally, a business can only repay its debts with hard cash, not with accounting profits. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Over the past three years, Arcadis has indeed generated more free cash flow than EBIT. This kind of solid silver generation warms our hearts like a puppy in a bumblebee costume.

Our point of view

Arcadis’ EBIT conversion to free cash flow suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Given this set of factors, it seems to us that Arcadis is fairly careful with its debt, and the risks seem well under control. The balance sheet therefore seems rather healthy to us. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Arcadis you should know.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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.

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