Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Adecco Group AG (VTX:ADEN) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Adecco Group
What Is Adecco Group's Debt?
You can click the graphic below for the historical numbers, but it shows that Adecco Group had €1.97b of debt in June 2019, down from €2.07b, one year before. On the flip side, it has €576.0m in cash leading to net debt of about €1.40b.
How Strong Is Adecco Group's Balance Sheet?
We can see from the most recent balance sheet that Adecco Group had liabilities of €4.56b falling due within a year, and liabilities of €2.24b due beyond that. Offsetting these obligations, it had cash of €576.0m as well as receivables valued at €4.51b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.71b.
This deficit isn't so bad because Adecco Group is worth €7.78b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.