These 4 metrics indicate Motorpoint Group (LON:MOTR) uses debt a lot
Warren Buffett said: “Volatility is far from synonymous with risk. 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. Like many other companies Motorpoint Group plc (LON:MOTR) uses debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
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, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Motorpoint Group
What is the debt of the Motorpoint group?
As you can see below, at the end of September 2021, Motorpoint Group had debt of £104.0m, up from £80.5m a year ago. Click on the image for more details. However, as he has a cash reserve of £6.00m, his net debt is lower at around £98.0m.
How healthy is Motorpoint’s balance sheet?
According to the latest published balance sheet, Motorpoint Group had liabilities of £148.8m due within 12 months and liabilities of £52.9m due beyond 12 months. In return, he had £6.00 million in cash and £8.90 million in debt due within 12 months. Thus, its liabilities total £186.8 million more than the combination of its cash and short-term receivables.
That shortfall is sizable compared to its market capitalization of £276.1m, so it suggests shareholders watch Motorpoint Group’s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.
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.
Motorpoint Group has a fairly high debt to EBITDA ratio of 5.8, which suggests significant leverage. However, its interest coverage of 4.9 is reasonably strong, which is a good sign. Importantly, Motorpoint Group’s EBIT has fallen by 32% over the last twelve months. If this earnings trend continues, paying off debt will be about as easy as herding cats on a roller coaster. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Motorpoint Group’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, Motorpoint Group has recorded free cash flow of 46% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Our point of view
To be frank, Motorpoint Group’s net debt to EBITDA ratio and history of (non-)growth in EBIT makes us rather uncomfortable with its debt levels. That said, its ability to convert EBIT to free cash flow is not that much of a concern. We are quite clear that we consider Motorpoint Group to be rather risky, 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. 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, the Motorpoint group has 2 warning signs (and 1 which is significant) that we think you should know about.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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