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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, NV Bekaert SA (EBR:BEKB) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for NV Bekaert
How Much Debt Does NV Bekaert Carry?
As you can see below, NV Bekaert had €1.65b of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, because it has a cash reserve of €469.1m, its net debt is less, at about €1.18b.
A Look At NV Bekaert's Liabilities
The latest balance sheet data shows that NV Bekaert had liabilities of €1.63b due within a year, and liabilities of €1.29b falling due after that. On the other hand, it had cash of €469.1m and €968.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.49b.
When you consider that this deficiency exceeds the company's €1.40b market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).